We have quite an eventful day ahead of us today, with two central banks set to announce interest rates. Also, Turkey’s central bank could play its part in today’s potential increase in volatility, as the bank is expected to deliver it new policy on how to help stabilise the fragile Turkish economy.
The first big for today and possibly market-driving news, will be from the Bank of England, which is set to announce their interest rates. As we mentioned previously, at their last interest rate decision, the BoE decided to increase the rate by 25 bps, going from +0.50% to +0.75%, with a 9-0 vote, instead of the 7-2 projected at that time. Today, the bank is expected to keep the rate at the same level as previously, where the vote could also go with 9-0, so there could be no surprises from the bank on that matter.
In the previous Monetary Policy report, officials stated, that the labour market will continue to tighten, and labour costs will remain flat. The expectation for the GDP is to continue to grow, together with the global demand as financial conditions remain attractive. Consumption continues to move at a steady pace in line with real incomes.
It’s a big day for the ECB as well, as it is also set to deliver their interest rate decision, together with the deposit facility rate. Also, like the BoE, the expectation is that there won’t be any surprises in terms of the rate. The forecast will remain the same as previously at 0.00%. But the main focus will be on Draghi’s press conference, which is scheduled to start 45 minutes after the rate announcement. This is where traders and investors will stay sharp and listen carefully to what the ECB president has to say.
During the last introductory statement, Mario Draghi said that economic indicators have stabilised, which point to economic growth. Also, the underlying inflation remains generally muted but is expected to increase gradually over the medium-term. All this was also accompanied with the fact that the ECB is not planning to raise interest rates till the summer of 2019.
The British pound is trading higher this week against the US dollar, but there is one currency that is outperforming the GBP which is the Australian dollar. GBP/AUD, at the time of this analysis, is turning the weekly candle bearish. Also, what is important to mention, is that the pair has now broken down through its short-term upside support line, taken from the low of the 29th of August. This makes us believe that we could see another move lower, at least in the short-run.
GBP/AUD found good support near the 1.8140 level, marked by the low of the 10th of September, from which the pair rebounded and moved slightly to the upside. If that level gets tested again, but this time GBP/AUD closes below it, we could then start examining a potential for a further decline towards the 1.8055 zone that could play out as a good initial support, a break of which could set the stage for another move lower. This is where the 1.7935 area could get tested, which is marked by the low of the 6th of September, but a strong break below it could open the path toward the 1.7830 obstacle.
Alternatively, for us to start examining higher levels, we would need to see GBP/AUD moving back above the aforementioned upside line. But a much better confirmation of a possible move higher could be a break and a close above the 1.8375 barrier, marked by the peak of the 11th of September. This could interest more bulls to join in and drive the pair towards 1.8475, a break of which, could set the stage for a test of the 1.8675 level, marked near the low of the 25th of April 2016.
Today, the Turkish central bank is expected to deliver the news regarding their plans on the one-week repo rate, which currently sits at +17.75%. But the bank faces a dilemma, as the majority of international investors, whose money is very important for the Turkish economy, are suggesting that the rate should be lifted, in order to maintain inflation at stable levels, otherwise the country could start losing its attractiveness in the global arena.
On the other hand, the central bank is under pressure from the Turkish president Recep Tayyip Erdogan, who called himself the “enemy” of high interest rates. The rise of the interest rate could slow down the growth of the economy, something that Erdogan does not want to see, as he has to maintain his image of a strong leader in front of his electorate. All this puts the Turkish central bank in a difficult position, making it hard to decide on its future move.
The Turkish lira has already lost more than 40% of its value to the US dollar, since the start of this year. A rise in the interest rates, could stabilise USD/TRY a bit, but the question here is, would this action be enough to pull Turkey out of this impasse.
The bulls and the bears of USD/TRY are waiting in anticipation of the next big news to come out of Turkey today. Since around mid-August, the pair continues to trade below a short-term downside resistance line, taken from the peak of the 12th of August. This week, the USD/TRY broke below its short-term upside support line, drawn from the low of the 16th of August. This creates a small chance for the bears to potentially jump in and take advantage of this situation. That said, we should still remain somewhat cautious and await the Turkish central bank decision.
USD/TRY broke through the 6.3710 support zone, but now, at the time of this analysis, is trying to get back above it. If the pair closes below that support zone, this could be quickly picked up by the bears, who in their case, could drive USD/TRY lower towards the 6.1050 hurdle. A break below that, could open the way to the next potential area of support at 5.9630, marked by the low of the 27th of August. If that area does not break the fall, the bears could pull the pair lower to test the 5.6797 barrier, last seen as the low of the 16th of August.
On the upside, a strong move back above the 6.6335 obstacle could lead towards the 6.8300 level, marked by the high of the 30th of August. If that level is not able to withhold the rate from rising, more bulls could start jumping in and lifting USD/TRY toward the all-time high near the 7.1100 zone. Further acceleration of the rate could lead to new all-time highs.
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