Hungary’s inflation was slightly lower than forecast, recorded at 4.3% against the expected 4.5%, implying potential strength for the Hungarian Forint (HUF). Core inflation rose above the central bank’s tolerance from 3.9% to 4.2%, delaying expected rate cuts.
With the public finance deficit revised upwards from 4.3% to 5.0% of GDP for this year, and from 3.7% to 5.0% for the next, the market responded by steepening the curve. This led to increased pressure on bonds, though the market had anticipated such fiscal expansion due to forthcoming elections.
Market Reaction
The EUR/HUF rate increased slightly by 0.5%, though the forint regained some ground, suggesting that the expected additional spending has been factored in by the market. In the current economic climate, foreign exchange appears to be more stable than fixed income, maintaining a level below 386 EUR/HUF. This implies acclimatisation to the market’s financial environment, with minimal shifts expected in the short term.
Recent data for October 2025 shows headline inflation easing slightly to 3.8%, but stubborn core inflation remains elevated at 4.1%, well above the central bank’s target range. This persistence suggests the Hungarian National Bank will maintain its restrictive monetary policy, keeping short-term interest rates high into early 2026. This hawkish stance is providing a baseline of support for the forint.
At the same time, the government’s fiscal policy is creating a divergence that traders can exploit. The public finance deficit is tracking at 5.1% of GDP for 2025, a level that is making the bond market nervous. We saw a similar dynamic with pre-election spending back before the 2022 elections, which historically put pressure on government debt.
Investment Strategy
This tension is causing the yield curve to steepen, as long-term bond yields rise to compensate for the higher fiscal risk. For derivative traders, this suggests setting up curve steepener trades using interest rate swaps, positioning to profit as the gap between long-term and short-term rates widens. The premium demanded for holding long-dated Hungarian government paper is set to increase.
In this environment, the forint is a more stable asset than government bonds. The central bank’s commitment to fighting inflation is anchoring the currency, which we expect to hold firm below the 386 level against the euro. Selling EUR/HUF call options with strikes near 388 could be a viable strategy to earn premium from the currency’s expected stability.
