Book-to-read rate could struggle at 12.14 even after CRBT rate cut

– Limited GBP / TRY increase if USD / TRY stays below 8.80
– Would struggle at 12.14 as GBP rallies against USD
– But analysts’ bearish TRY views suggest upside risks

Above: Governor of the CBRT Şahap Kavcıoğlu. Image © CBRT

  • Reference rate GBP / TRY at publication:
  • Location: 12.05
  • Bank transfers (indicative guide): 11.63-11.72
  • Specialist money transfer rate (indicative): 11.95-11.99
  • More information on obtaining specialized rates, here
  • Set up an exchange rate alert, here

The exchange rate of the pound against the pound was on its way to late June highs around 12.14 on Thursday following a surprise interest rate cut by the Central Bank of the Republic of Turkey ( CBRT), although it may struggle to break above that level if the USD / TRY continues to hold below its own recent high.

Turkish exchange rates fell sharply after the CBRT cut its benchmark interest rate from 19% to 18% as part of the September monetary policy decision, a move that many analysts expected would ‘intervene only in the last quarter of the year.

At the time of writing, Turkey’s main USD / TRY exchange rate had been pushed back from an earlier attempt to climb above 8.80, which is the all-time high set in June, and all the time that this resilience remains, it could be used to maintain the GBP / TRY. to surpass its July peak of 12.14.

This is unless the major GBP / USD exchange rate is in the meantime able to climb above the 1.38 handle, as GBP / TRY still closely reflects the relative performance of the major Sterling and Lire exchange rates. .

However, Thursday’s policy decision is an open invitation to pound skeptics and has led some analysts to become more confident about forecasts that new all-time lows will soon be seen with USD / TRY set to go well above 8.80. in the coming weeks.

“Today’s 100bp cut by the CBRT is a moment that investors have long feared, as it indicates that President Erdogan’s preference for low rates has now materialized,” said Ima Sammani, analyst of the forex market at Monex Europe, which advises USD / TRY to exceed the 9.00 handle.

TRY exchange rates

Above: GBP / TRY and USD / TRY displayed at daily intervals.

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“Turkey has experienced considerably higher inflation than other emerging markets in recent years as prices have been held back by the depreciation of the TRY, the depletion of monetary credibility and now also an explosion in demand as the economy is reopening, ”Sammani wrote in a note on Thursday.

The September rate cut suggests the CBRT abandoned a multi-month commitment to keep the cash rate above the prevailing inflation level, and the bank appeared to confirm this by omitting the commitment from the statement. September policy, which triggered a sharp drop in the lira.

Turkish inflation rose from 18.95% to 19.25% in August, its highest level since 2018, due to rising international energy prices and disruptions in global supply chains that made increase the price of goods for almost all countries.

Under the bank’s earlier approach to inflation, any further increase in price pressures could have forced it to hike Turkey’s interest rate at a time when the CBRT was widely seen as looking for an opportunity to reduce it.

“While the effects of high global inflation on inflation expectations and international financial markets are closely watched, central banks in developed countries consider the rise in inflation to be mostly temporary,” the CBRT said in his press release.

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“In this context, central banks of developed countries are maintaining their favorable monetary positions and continuing their asset purchase programs,” the bank said later, before adopting a similar view on the outlook for inflation. Turkish.

While many market participants expected a rate cut to be announced before the end of the year, Thursday’s came earlier than almost everyone expected and could mean the lira is expected to suffer. new pressures in the coming weeks.

“Reading it will be the usual shock absorber,” says Cristian Maggio, head of emerging markets strategy at TD Securities. “The CBRT has, however, partially replenished its modest cushion of foreign exchange reserves, also signing new international swap agreements with foreign central banks or expanding existing lines.”

Maggio and the TD team predict that the USD / TRY rate will rise to 8.85 by the end of September and to 9.15 by the end of the year, although the CBRT has recently increased its foreign exchange reserves. From about $ 49 billion in May to $ 78 billion in August, they predict that these losses will be regular and orderly.

“This will give the CBRT ammunition to support the currency when needed, but not if the market is severely short on the TRY. This consideration suggests that the CBRT will need to tailor the pace of easing to market dynamics, possibly suspending easing or reducing its pace when negative currency pressure intensifies, ”Maggio wrote in a research note. Thursday following the CBRT decision.

Lira weekly exchange rates

Above: GBP / TRY and USD / TRY displayed at weekly intervals.

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