EUR/USD consolidates around 1.14 ahead of ECB meeting
The European Central Bank is expected to keep policy unchanged today. Nevertheless, in light of yesterday disappointing PMIs figure from the euro-area, one cannot exclude that Mario Draghi would shift to a more cautious tone regarding the growth outlook. The euro-area composite PMI contracted to 52.7 in October from 53.9 in the previous month and missed median forecast of 53.9. In addition, growth estimates have also been downwardly revised as economic growth is expected to have eased to 1.8%y/y in the third quarter, down from 2.1% in the June quarter.
Market participants are also expecting Mario Draghi to make some remarks about the ongoing situation in Italy. However, the ECB President always took great care to avoid commenting such subjects. Nevertheless, he would certainly recognize that it is creating short-term uncertainties, just as the ongoing trade war between the US and its main trading partners.
Overall, we believe that the risk is mostly skewed to the upside for the single currency. The euro already went through a substantial sell-off over the last few weeks. Just yesterday, the euro fell 0.65% against the greenback and fell to its lowest level since mid-August. We remain confident the Italian situation would be resolved shortly. After all, the Italian government made clear it was ready to discuss its budget with the EU commission.
Stronger Turkish lira ahead of CBRT meeting
Optimism for long Turkish lira (TRY) investors appears to be a sound strategy since the release of US pastor Andrew Brunson on 12 October. The lira remains below the 6 range against the greenback and has risen 4%. Today’s Central Bank of Turkey (CBRT) meeting, however, could be a turning point for the trend that started in mid-October amid a weaker USD.
Although the current rally remains TRY supportive, the fundamentals have not changed. Inflation outreaches the 24% threshold (September y/y CPI 24.52%) and despite the recent rise of 625 bps from the prior MPC on 13 September. The current 1-Week Repo rate given at 24% implies a real interest rate near zero.
Therefore, as energy products account for approximately 70% of the rise in Turkish inflation and with it approaching the 25% mark by year-end, market participants will be expecting the CBRT to raise its key rate by 100 bps minimum. No reaction from the monetary institution side will tend to favour a decline in the Turkish lira.
Accordingly, currently trading along 5.7025, USD/TRY is expected to decline along 5.62 in the event of an interest rate hike. If the CBRT decides to do nothing, we can expect a rise of the pair along 5.78.
