After the Hungarian election, the forint strengthens: what is behind the shift?

After the Hungarian elections, there was a striking turnaround in the forint’s exchange rate. The euro, which had previously traded around 390–400 forints, moved close to 360 within a short period of time. At first glance, the speed of the change may seem surprising. In reality, however, it does not reflect a sudden improvement in economic fundamentals, but rather a shift in investor expectations.

Why was the forint weak?

In the period before the elections, the forint remained persistently weak. One of the main reasons was that investors had built a significant risk premium into the exchange rate.

Political disputes with the European Union, and the delayed or uncertain access to EU funds resulting from them, put serious pressure on the Hungarian currency. In addition, concerns about the predictability of economic policy — such as ad hoc measures and special taxes — further increased uncertainty.

Geopolitical factors also played a role: Hungary’s particular balancing act between the Western alliance system and Russia, as well as its energy dependence, made the country more vulnerable to external shocks. Taken together, these factors created a kind of “political discount” in the forint’s exchange rate.

What changed after the election?

The election result strengthened the forint not because of specific economic measures, but because it changed expectations about the future.

Markets quickly began to price in the possibility of improved relations with the European Union, which could accelerate the inflow of EU funds. There was also an expectation that a more predictable, more “Western-oriented” economic policy could follow, with fewer extraordinary interventions and a more stable institutional environment.

The prospect of geopolitical repositioning — strengthening NATO and EU integration, while reducing conflicts — was also a key factor in the eyes of investors.

What drove the strengthening?

The rapid appreciation of the forint can be explained by three main mechanisms.

First, the risk premium attached to Hungary decreased. Second, the market priced in future capital inflows in advance, whether in the form of EU funds or foreign investment. Third, many investors had previously bet on a weakening of the forint, and the closing of these positions further strengthened the exchange rate.

How long can this trend last?

It is important to emphasize that the current exchange rate reflects not the present state of the economy, but a hypothetical future. If the positive expectations — such as an agreement with the EU or a more predictable economic policy — are actually fulfilled, the forint may remain at a stronger level over the longer term.

If, however, these expectations are not confirmed, the exchange rate could easily return to weaker levels.

A brief assessment

Before the elections, the forint was weakened by political and economic-policy risks. After the elections, it strengthened on expectations that these same risks would decline. The key difference, therefore, is not that the economy changed from one day to the next, but that markets began to see a different future for Hungary.

Photo: Getty Image