EUR/TRY drops on ECB and CBRT rate decisions
Fawad Razaqzada September 12, 2019 4:38 PM
The CBRT’s decision comes on the back persistent pressure from President Erdogan, who has been calling for lower interest rates for months – if not years – despite the runaway inflation.
The ECB was not the only central bank cutting interest rates today. The Turkish central bank also trimmed rates, but by a good 325 basis points – more than 250 expected. This comes on the back of the 425 bp cut in July. Following today’s cut, the key interest rates now stand at 16.50% in Turkey.
The CBRT’s decision comes on the back persistent pressure from President Erdogan, who has been calling for lower interest rates for months – if not years – despite the runaway inflation. At 16.65%, the Consumer Price Index in Turkey is among the highest for a developing economy.
With interest rates falling, some analysts think that inflation could accelerate again and cause more economic pain. As a result, the lira could come under renewed pressure, they argue.
However, for the time being, the beleaguered currency has actually responded positively to the rate decision, suggesting investors are more concerned about economic growth than inflation, supporting the view of the President.
Given (1) the TRY’s positive response to the CBRT’s rate cut, (2) the announcement of more monetary stimulus by the ECB today, (2) ongoing capital controls by the Turkish government, and (4) the ongoing “risk-on” sentiment, the EUR/TRY could be heading lower over the coming weeks, before the longer term macro factors come back to the forefront and undermine the TRY.The EUT/TRY has actually already formed a near-term peak when the spike above the 6.5000 handle on August 25 turned out to be just that – a spike. Since then, rates have been trending lower and now find themselves below the 200-day moving average. With this long-term average broken, the path of least resistance is now to the downside. We expect the exchange rate to decline and eventually test the prior lows around 6.1200 and possibly 5.8450 over the coming weeks.
Source: Trading View and City Index.
GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.
No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.