CEE Market Analysis: Hungarian Assets Face Heavy Sell-Off Amid Global Risk-Off, But High Carry Offers Attractive Re-Entry Points, Says ING

The Central and Eastern Europe (CEE) financial markets have recently experienced a wave of volatility, characterized by a broad risk-off sentiment that has swept through regional currencies and debt instruments. Led by a combination of surging global crude oil prices and rising core yields in developed markets, CEE interest rates have climbed significantly.

Among regional peers, Hungarian assets have borne the brunt of this selling pressure. However, according to a detailed market analysis by Frantisek Taborsky, an EMEA FX and Fixed Income Strategist at ING, this correction does not represent a fundamental breakdown of the regional investment thesis. Instead, Taborsky views the sell-off as an overdone reaction driven by crowded long positions and tactical profit-taking, presenting highly attractive entry points for investors looking to capitalize on high carry yields.

Main Facts: The Core Drivers of the CEE Market Correction

The recent turbulence in CEE financial markets can be synthesized into several critical market developments:

• Broad Risk-Off Environment: A combination of elevated global crude oil prices and rising core yields (such as US Treasuries and German Bunds) has tightened global financial conditions. This has triggered a classic risk-off rotation away from emerging market (EM) assets, pushing CEE interest rates higher across the board.
• Hungarian Assets Under Pressure: Hungarian debt and the forint (HUF) have faced the most intense selling pressure within the EM space over the last several sessions. The EUR/HUF cross rate surged past the 361 mark, reaching its highest level since mid-May and returning to levels last observed shortly after the April general elections.
• Crowded Longs and Profit-Taking: ING attributes the sharp sell-off in Hungary to heavily crowded long positions. Following the April general elections, a highly optimistic market consensus formed around Hungarian assets, leaving the market vulnerable to a rapid unwinding of positions when global conditions deteriorated.
• Hawkish Recalibration of Regional Rate Expectations:
  • Czech Republic: Markets have shifted away from pricing near-term rate cuts by the Czech National Bank (CNB), instead pricing in the implied probability of almost two additional rate hikes.
  • Poland: Expectations for a rate cut by the Narodowy Bank Polski (NBP) this year have plummeted, with the implied probability now sitting at just 20%.
  • Hungary: The Magyar Nemzeti Bank’s (MNB) expected easing cycle has been scaled back from an anticipated 150 basis points (bps) down to 120 bps.
• ING’s Constructive Outlook: Despite the short-term pain, ING maintains a bullish medium-term outlook on Hungarian assets. Strategist Frantisek Taborsky views the sell-off as overdone, maintaining that both Hungarian interest rates and the FX market remain highly attractive due to elevated carry. ING expects the EUR/HUF to trade primarily within a 350–360 corridor for the remainder of the year.

Chronology: From Post-Election Euphoria to the Global Yield Shock

To understand the sudden reversal in CEE markets, it is necessary to trace the market’s path over the preceding months:

The Post-Election Rally and Crowded Longs

Following Hungary’s general elections in April, political uncertainty subsided, prompting international investors to flood back into Hungarian assets. The combination of exceptionally high domestic interest rates—offered by the Magyar Nemzeti Bank (MNB) to combat inflation—and a stabilizing political backdrop turned the Hungarian Forint (HUF) into a darling of the emerging market carry trade. Over the subsequent weeks, EUR/HUF steadily appreciated (dropping from post-election highs down toward the 350 level). This prolonged appreciation created highly crowded long positions, as institutional investors clustered around the same bullish thesis.

The Dual Shock of Global Yields and Elevated Oil

By mid-year, the global macroeconomic backdrop began to shift. Persistent inflation in the United States and the Eurozone forced major central banks (the Federal Reserve and the European Central Bank) to signal that interest rates would remain "higher for longer." This pushed US Treasury and German Bund yields—the risk-free benchmarks of global finance—to multi-year highs. Simultaneously, supply-side constraints and geopolitical tensions pushed global crude oil prices upward. For energy-importing economies in Central and Eastern Europe, rising energy costs act as a direct tax on economic growth and a source of imported inflation, rapidly deteriorating their terms of trade.

The Capitulation and Triggering of Stop-Losses

With global risk-off sentiment intensifying, the crowded long positions in Hungarian assets became a liability. As international funds sought to reduce risk and lock in year-to-date profits, a wave of selling began. This selling pressure quickly snowballed as stop-loss orders were triggered, forcing a rapid depreciation of the HUF. Within a matter of days, EUR/HUF broke through key technical resistance levels, stabilizing above 361—a level not seen since mid-May.

[April: Post-Election Rally] ➔ [May-June: Crowded Longs / HUF Appreciates] ➔ [Global Shock: High Oil & Core Yields] ➔ [July: Capitulation / EUR-HUF Spikes Above 361]

Supporting Data: Dissecting Rate Curves and FX Metrics

The impact of this market correction is clearly visible in the shifting interest rate swap (IRS) curves and FX pricing models across the CEE-3 economies (Hungary, Poland, and the Czech Republic).

Hungary: Easing Cycle Scaled Back

The Hungarian interest rate market has undergone a significant hawkish repricing. Just a few sessions prior to the sell-off, money markets were pricing in a total of 150 basis points in rate cuts from the MNB for the remainder of the year. Following the currency depreciation and the rise in global yields, these expectations were scaled back to 120 basis points.

This repricing reflects the central bank’s need to maintain a defensive premium to protect the currency. The yield curve has also steepened, with the front end of the curve offering elevated yields that, according to ING, present a highly lucrative entry point for carry-trade investors.

Poland: Rate Cut Hopes Evaporate

In Poland, the interest rate swap market has aggressively priced out monetary easing. Earlier in the quarter, investors were confidently positioning for rate cuts by the Narodowy Bank Polski (NBP) before the end of the year. However, due to sticky domestic inflation and global pressures, the implied probability of a Polish rate cut this year has collapsed to approximately 20%.

Czech Republic: A Hawkish Turn

The Czech National Bank (CNB) has seen the most dramatic swing in market pricing. While the market had previously begun to price in the start of an easing cycle, the latest swap market data reveals that investors are now pricing in almost two full 25-basis-point rate hikes. This hawkish shift has supported the Czech Koruna (CZK) relative to its regional peers, although it has still faced pressure from rising core European yields.

Official Responses: Central Bank Stances in the CEE-3

The shifting market dynamics have placed regional central banks in a delicate position, forcing policymakers to balance domestic inflation concerns against the risk of capital flight.

Magyar Nemzeti Bank (MNB)

The Hungarian central bank remains highly sensitive to the exchange rate, as a weaker forint directly feeds into domestic inflation through imported goods. While the MNB has sought to normalize monetary policy and support credit growth by gradually lowering its ultra-high key policy rates, the recent spike in EUR/HUF above 361 has limited its room for maneuver.

Policymakers have reiterated that keeping a stable and strong currency is paramount to anchoring inflation expectations. The scaling back of the priced easing cycle from 150 bps to 120 bps demonstrates that the market expects the MNB to adopt a more cautious, hawkish approach to prevent further depreciation of the forint.

Narodowy Bank Polski (NBP)

In Poland, the NBP has maintained a relatively hawkish posture, despite political pressure to lower borrowing costs. Central bank officials have pointed to persistent core inflation and expansionary fiscal policy as key reasons to keep interest rates restrictive. The market’s reduction of rate cut expectations to 20% aligns closely with the NBP’s official rhetoric, which stresses that monetary policy must remain tight until inflation is firmly secured within the target band.

Czech National Bank (CNB)

The CNB, led by Governor Aleš Michl, has consistently warned that the fight against inflation is far from over. Despite domestic economic weakness, the bank has resisted calls for rapid rate cuts. The market pricing of nearly two rate hikes suggests that investors believe the CNB is prepared to tighten policy further if global energy prices continue to stoke inflationary pressures, or if the weakness of the koruna threatens price stability.

Implications: Carry Trade Resilience and Strategic Outlook

Despite the dramatic nature of the recent sell-off, the underlying structural story for CEE assets—and Hungarian assets in particular—remains intact. The market correction has cleared out weak, speculative long positions, creating a healthier technical foundation for the next market cycle.

The Carry Trade Remains King

The primary investment thesis for the Hungarian Forint has long been its high carry yield. Even with a reduced easing cycle of 120 basis points, the Hungarian front-end yield curve remains exceptionally high compared to Eurozone and US peers. For yield-hungry global investors, the current entry levels—with EUR/HUF trading above 361—provide an appealing risk-reward ratio. Investors can capture high interest rate differentials while buying the currency at a discounted rate compared to its post-election peaks.

High Nominal Interest Rates (Hungary) - Low Eurozone Rates = Highly Attractive Carry Yield
                                                                     │
                                                       Enhanced by EUR/HUF > 361 Entry Point

ING’s EUR/HUF Forecast

ING’s Frantisek Taborsky emphasizes that the fair value of the forint has not been structurally damaged by the global risk-off move. The bank maintains its forecast that the EUR/HUF will trade primarily within the 350–360 range for the remainder of the year. Once global bond markets stabilize and crude oil prices find a sustainable ceiling, capital is expected to flow back into high-yielding CEE currencies, driving the EUR/HUF back down toward the lower bound of this target range.

Key Risks to Watch

While the medium-term outlook remains constructive, several downside risks could delay the recovery of CEE assets:

1. Persistent Energy Shock: If crude oil prices climb significantly higher, the terms-of-trade shock could put renewed pressure on CEE trade balances, forcing further currency depreciation regardless of high interest rates.
2. Uncontrolled Rise in US Yields: If the Federal Reserve is forced to hike interest rates further due to a resilient US economy, the resulting dollar strength and surge in US yields could trigger a broader, more systemic emerging-market sell-off.
3. Geopolitical and Fiscal Headwinds: Any escalation in regional geopolitical tensions or fiscal slippage by regional governments could dent investor confidence, keeping risk premiums elevated.

In conclusion, while the recent sell-off in Central and Eastern European assets has tested investor resolve, market experts view the correction as a tactical pause rather than a structural reversal. For disciplined investors, the combination of repriced, hawkish central bank curves and cheaper currency valuations offers a compelling opportunity to rebuild positions in one of the emerging market space’s most lucrative carry trades.