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 FOREX.com.
Risk Warning Notice Foreign Exchange and CFD trading are high risk and not suitable for everyone. You should carefully consider your investment objectives, level of experience and risk appetite before making a decision to trade with us. Most importantly, do not invest money you cannot afford to lose. There is considerable exposure to risk in any off-exchange transaction, including, but not limited to, leverage, creditworthiness, limited regulatory protection and market volatility that may substantially affect the price, or liquidity of the markets that you are trading. Margin and leverage To open a leveraged CFD or forex trade you will need to deposit money with us as margin. Margin is typically a relatively small proportion of the overall contract value. For example a contract trading on leverage of 100:1 will require margin of just 1% of the contract value. This means that a small price movement in the underlying will result in large movement in the value of your trade – this can work in your favour, or result in substantial losses. Your may lose your initial deposit and be required to deposit additional margin in order to maintain your position. If you fail to meet any margin requirement your position will be liquidated and you will be responsible for any resulting losses.