Dollar holds ground ahead of busy week
After extending gains against most of its peers amid renewed concerns over trade tensions, the greenback started the week slowly and consolidated gains. The dollar index stabilised around 95.10 as EUR/USD rose 0.15% to 1.1618, while the pound sterling eased -0.33% to 1.2917 as a no-Brexit deal continued to weigh. Market participants remained cautious as NAFTA negotiations between the US and Canada are still going on.
Despite a busy week in term of economic data, political and geo-political developments will remain the main driver in the FX market this week. In the US, August’s ISM manufacturing will be release on Tuesday; ADP employment change will be published on Wednesday; August’s ISM non-manufacturing PMIs and durable goods orders will be release on Thursday; finally, the labour report is due on Friday (NFPs, unemployment and wage growth).
Recently, the Federal Reserve has turned more dovish and traders are not so confident the central bank will continue to hike rates aggressively next year. The market has priced two more rate hikes for this year but doesn’t know where to stand regarding next year. Therefore, a positive surprise in Friday’s labour report will have a limited impact on markets, while a negative surprise could weigh significantly on the greenback.
Further acceleration in Turkish inflation
Fears of contagion related to the Turkish banking system continues to spread, pushing the Turkish lira downward as inflation continues to grow at a higher pace than expected. Further bearish move on the TRY is expected as long as no obvious intervention from the Turkish Central Bank is communicated and implemented.
For now, August CPI data are given at a higher rate than what market participants would have expected. Annual and monthly figures are given at +17.90% and +2.30% (consensus: +17.60% and +1.84%), its highest rate in 15 years and this is certainly not going to stop for now, as inflation could reach as much as 25% by the end of 2018, thus remaining far from actual 5% target set by the Turkish Central Bank. Accordingly, with weaker domestic demand and economic confidence (at 9-years low) along with a drastic slowdown in industrial production, Turkey’s GDP growth is expected to slowdown in Q3 while given along 7% in Q2.
Further weakness in Turkish lira until next TCMB MPC is anticipated. Recent announcements from the central bank hints towards a policy adjustment during its meeting in 13. September next week. However, if the response is not perceived as appropriate, the Turkish lira will continue losing ground.
USD/TRY overshot the 6.50 range last week and currently trades along 6.62, approaching the 6.75 range in the short-term.
