USD/HUF price forecast: Higher interest rates unlikely to help the Hungarian forint

Europe has a sick child right at the heart of it – Hungary. While not a euro area member, Hungary is part of the European Union. It has a small economy compared to other countries in the area, but it also has a strategic geographical location in Central and Eastern Europe.

The country battles high inflation and low economic growth in 2023. Its economy performed poorly, as reflected by four consecutive quarters of negative economic growth.

Besides having an economy in a technical recession, Hungary battles high inflation, too. Local inflation is much higher than in other European countries, currently sitting at 17.6%.

Because it is way above the Hungarian National Bank’s target of 3%, and much higher than the tolerance band, the central bank raised the bank base rate spectacularly. The base rate reached 13%, up from 0.6% in July 2020.

Since then, the Hungarian National Bank has raised the base rate at every meeting. The higher inflation went, the more it hiked.

Perhaps this is why the Hungarian forint gained some ground against the dollar. Last October, the USD/HUF exchange rate peaked at 450 as investors were thrilled about higher interest rates.

But the mix of poor economic growth and high inflation calls for caution. What if Hungary becomes Europe’s Argentina?

USD/HUF bounced from the 2023 lows

Higher interest rates do not always work to support a currency. Many examples exist in the world with countries that raised rates aggressively to stop inflation and failed. Argentina is only one example.

Unless households and businesses truly believe that the central bank will succeed, inflation expectations will remain unanchored. What results is a central bank chasing higher inflation with higher interest rates.

USD/HUF found support at the 340 area where it formed an inversed head and shoulders pattern. A move above the pivotal area seen at 380 would further squeeze short-sellers despite the high interest rates.

To sum up, the Hungarian forint should remain under pressure if the USD/HUF climbs back above 380. The combination of high inflation and poor economic growth is enough to keep investors away from the forint.