Two major European currencies are facing significant challenges that could reshape investor sentiment toward emerging markets, according to separate analyses from leading financial institutions. The Polish zloty (PLN) is grappling with sustained political risk from a deepening coalition split, while the Hungarian forint (HUF) is at a critical inflection point due to rapid disinflation, forcing a dramatic monetary policy pivot.
Polish Zloty Under Political Pressure
Commerzbank warns that a deepening rift within Poland's ruling coalition government is injecting sustained political risk into the outlook for the Polish zloty. The coalition, formed after the 2023 parliamentary elections, unites several parties with divergent economic priorities, leading to internal disagreements on budget spending, tax policy, and judicial reforms that have escalated into public disputes.
This political friction directly translates into currency market uncertainty, with Commerzbank's model suggesting that every major public disagreement within the coalition correlates with a 0.5% to 1.5% increase in implied volatility for the EUR/PLN pair. Key policy flashpoints include delays in accessing EU Recovery Funds worth billions of euros, clashes over fiscal policy between social transfers and infrastructure investment, and complications for the National Bank of Poland's inflation-fighting efforts due to unpredictable fiscal decisions.
The situation has broader economic consequences: sovereign credit default swap (CDS) spreads for Poland have widened relative to regional peers, the Warsaw Stock Exchange (WIG) has underperformed other Central European bourses year-to-date, and credit rating agencies like Moody's and Fitch have emphasized political cohesion in their latest outlooks. The upcoming 2025 budget debate represents the next major stress test, with failure to pass a credible budget potentially triggering a severe reassessment of Poland's economic management by international investors.
Hungarian Forint Faces Disinflation Challenge
Meanwhile, BNY Mellon analysis reveals that sustained and rapid disinflation in Hungary is fundamentally reshaping market expectations for the Hungarian forint. After grappling with some of the European Union's highest inflation rates post-pandemic—peaking near 25% in early 2023—the pace of price increases has decelerated sharply to around 4.5% in Q1 2025.
This HUF disinflation narrative, moving faster than many forecasts, signals a critical inflection point for the National Bank of Hungary (MNB). The central bank now faces a complex policy dilemma: maintaining excessively high interest rates could unnecessarily stifle economic growth, while premature easing could risk reigniting inflationary pressures or triggering a sharp sell-off in the forint.
BNY Mellon's currency strategists project a measured, data-dependent policy pivot, anticipating initial rate cuts of 25 to 50 basis points, likely contingent on the forint maintaining stability against the euro. The pace of easing may accelerate in the latter half of 2025 if disinflation continues, though the terminal rate is expected to remain significantly above pre-pandemic levels.
The shifting policy expectations have immediate market consequences: the Hungarian government bond yield curve has begun to steepen in anticipation of rate cuts, and the forint's carry trade appeal is diminishing. This could lead to reduced speculative inflows, paradoxically requiring the MNB to maintain higher rates for longer to support the currency.
Regional Comparisons and Implications
The analyses highlight contrasting situations in Central Europe. Poland's political risk stems from internal coalition fragmentation, while Hungary's challenge involves monetary policy management during disinflation. The Czech Republic, with a more stable centrist coalition and inflation at 2.9% in Q1 2025, enjoys greater currency stability for the koruna (CZK).
Both reports emphasize that these developments extend beyond foreign exchange markets, affecting sovereign credit, equity performance, and foreign direct investment flows. For cryptocurrency markets, these traditional currency instabilities could influence broader emerging market sentiment and potentially drive capital toward alternative assets during periods of heightened volatility in traditional fiat currencies.
