Last week several important economic updates influenced the Forex market. US preliminary GDP fell less than expected (0.6% actual vs. 0.7% forecast). Below you will find the key events to trade on during the week from August 29 to September 2.
Turkey has Decreased Interest Rates, But is it a Buy?
Turkey’s central bank governor was at a crossroads: to hold interest rates and take a risk to be fired like it was for three governors before him, or to comply with the president, to cut rates, and to risk the market. Let’s find out, how to react to the rate cut.
Long story short:
- Turkey had 19% rate, which is one of the highest in the world, and now had cut it to 18%.
- Turkey's inflation is even higher, at 19.25% (as of August 2021).
- Turkey’s president Erdogan had fired 3 governors since 2019.
- Economic and political demands in Turkey are quite divergent.
Central Bank of the Republic of Turkey (CBRT) and its governor, Sahap Kavcioglu are in a complicated situation. The country’s economy is pressed from both inside and outside. In August the bank left the benchmark interest rate unchanged at 19%, in line with market expectations, for the fifth month in a row. But there is a problem. Turkey’s annual inflation rate stood at 18.95% in July, according to the latest data from the Turkish Statistical Institute (TurkStat), but now it has risen to 19.25%, making the real rate negative. And with the rate cut, it is now even worse.
What is going on with Lira?
The currency is down more than 16% since Kavcioglu’s appointment in March. Usually, it is an unambiguous signal to raise rates and to slow down TRY depreciation. But Erdogan is motivated not just to hold, but to cut rates, and this might cause a collapse in Turkey markets. But why would he do that? Many analysts say Erdogan appears to be growing impatient for monetary stimulus, given loans are expensive and he faces a tough election no later than 2023. A few say a prompt rate cut could even signal plans for an early vote.
In recent months, the central bank has urged patience due to unexpected inflation pressure brought on by rising global commodities prices and a surge in summer demand as pandemic restrictions eased. Despite the risk of currency depreciation and stubbornly high inflation, Erdogan has got what he wants.
The bank's policy committee said a rate cut was "needed" because of the lower core price measures - which strip out food and some other goods - as well as shocks to supply in the wake of pandemic measures.
Also, if Erdogan doesn’t stop changing governors, the lira will suffer even more, as every speech of him plunges the currency.
TRY’s technical overview
Obviously, the currency has weakened, and it will weaken further. As for the chart, USD/TRY is reacting to Fibonacci extensions and now we have a pullback from the 200 Fibonacci level. But it’s only a matter of time for the lira to fall.
USD/TRY H4 chart
Resistance: 8.720; 8.790
Support: 8.680; 8.510; 8.400
Have a look at the key financial instruments on Monday, February 28. Geopolitics is currently on all news frontlines. Western nations escalated sanctions on Russia for the invasion of Ukraine.
Reserve Bank of New Zealand (RBNZ) will reveal Official Cash Rate and make a statement about monetary policy on October 6, 04:00 GMT+3.
This week may be the most important since the year started as the Fed assess the economic outlook and the US presents fresh NFP readings.
S&P Global, a private banking company, will release a monthly change in British Flash Manufacturing Purchasing Managers Index (PMI) on January 24, 11:30 GMT+2. The index is a leading indicator of economic health as businesses react quickly to market conditions, and purchasing managers hold the most current and relevant insight into the company's view of the economy.
The United States Bureau of Labor Statistics will publish the US Consumer Price Index (CPI) m/m on January 12 at 15:30 GMT+2. The index measures a change in the price of goods and services purchased by consumers.