All CE currencies extended their gains at the beginning of this week as sentiment in EMU bond markets has improved further. While the EUR/PLN dipped below the 4.30 level, the vulnerable forint appeared even below the psychological EUR/HUF 300 level.
Hungary will remain in focus not only because of ongoing talks with the IMF, but because of its monetary policy. The Hungarian central bank is expected to hike the base rate by 50bps to 7.50%. The weak forint and unfinished talks with the IMF are warranting another hike, while faster negotiations may limit the end of the tightening cycle. The market is currently expecting to end at 8.25%, but we think it could be a bit below this at 8.00%. The December inflation data was broadly in line with expectations thus the weak forint has so far left prices broadly unaffected due to the weak demand. There is however the risk that this may change and the exchange rate may slowly pass through onto prices.