Forint, yields fall as dovish Fed may curb rate hike appetite

BUDAPEST: The forint and Hungarian government bond yields fell on Thursday as the US Federal Reserve's dovish forward guidance reduced expectations the National Bank of Hungary (NBH) will tighten monetary policy at its meeting next week.

A lower trajectory for US interest rates and a weaker dollar are generally positive for currencies in the European Union's emerging east but they may dissuade the Hungarian and Czech central banks not to tighten policy when their policymakers meet on March 26 and 28, respectively. The dollar meanwhile regained composure on Thursday.

Investors have in recent weeks scaled back forecasts that the Czech bank would raise rates again at its next meeting, to be held just a day before Britain will leave the EU if Brexit is not delayed.

But some analysts in a Reuters poll forecast that a rise in core inflation will force the Hungarian central bank to hike next week for the first time since it started to lower its base rate in 2012. It may raise its 0.15 percent overnight deposit rate.

After a rally in the last two months fuelled by the monetary tightening expectations, the forint was trading at 314.25 against the euro at 1350 GMT, weaker by 0.1 percent and off Wednesday's 11-month high of 312.65.

Hungarian government bond yields fell 8-10 basis points, more than their regional peers or German Bunds, with the five-year benchmark paper trading at 2.05 percent, a nine-month low.

"The Fed surprised on the dovish side ... and people wonder now if the NBH will back out from tightening," one Budapest-based trader said.

"In the case of Polish yields (which did not drop), the central bank there had not been expected to tighten policy anyway," the trader added.

The zloty was the only currency in the region that benefited from the dovish Fed comments. It touched a seven-week high of 4.2775 against the euro before trading at 4.2781, firmer by 0.15 percent on the day.

After a batch of strong economic data this week, Poland on Thursday reported a robust rise in retail sales in February.

The data confirming flourishing consumption suggest strong economic growth of 4.7-4.8 percent in the first quarter, Erste analyst Katarzyna Rzentarzewska said in a note.

But the risks of a recession in the United States and a chaotic no-deal Brexit are likely to keep a lid on Central European currencies, Rabobank analysts said in a note.

"In the coming days market confidence that the negative scenario of a hard Brexit will be avoided could weaken substantially, causing a sell-off in the Polish zloty and its peers versus the dollar and to a lesser degree against the euro," they said.