Confidence in the outlook of the Turkish economy took a fresh blow at the start of the week, when June’s Unemployment Rate unexpectedly leapt from 9.4% to 10.2%. This sharp increase did not encourage investors, with the slowing of the labour market boding ill for the wider economy. Higher unemployment is likely to drag on growth over coming months, adding pressure to the Turkish Lira as domestic political tensions remain high.
However, the Pound to Lira exchange rate struggled to hold onto any of its resultant gains for long. Worries over the outlook of the UK economy and uncertainty surrounding details of the country’s departure from the EU have remained a persistent drag on the Pound. Investors were also inclined to sell out of Sterling ahead of Wednesday’s public sector borrowing figures, which were forecast to show a deficit on the month in August.
The appeal of the Lira, meanwhile, was boosted by a surprise narrowing in Turkish government debt, which dipped from 712.1 billion to 710.9 billion. This prompted the GBP TRY exchange rate to slump further, particularly as market risk appetite strengthened. While there had been worries that the Federal Reserve could opt to raise interest rates at its September meeting those fears eased after some disappointing US data. As a result higher risk currencies such as the Lira benefitted, although markets remained somewhat jittery as the rate decision approached.
Lack of Action from Fed Prompted GBP TRY Downtrend
Reaction to August’s UK borrowing data proved bearish, even though net borrowing clocked in at 10.1 billion rather than the forecast 10.4 billion. With the UK set to overshoot its deficit reduction target for the 2016-2017 fiscal year the Pound slumped, with investors seeing a fresh reminder of the country’s heavy reliance on overseas borrowing. Concerns were also raised as to how much this could hamper any push for extra spending from Chancellor of the Exchequer Phillip Hammond in the Autumn Statement.
As the Fed ultimately remained on hold for another month the GBP TRY exchange rate slumped further. While Fed Chair Janet Yellen left the door open for a 2016 rate hike and three members of the Federal Open Market Committee (FOMC) voted for immediate action the news encouraged further market bullishness. Even so, the Lira remained on a volatile footing on Thursday, thanks to a mixed bag of domestic data.
Although consumer confidence weakened in September this was soon overshadowed by the Central Bank of the Republic of Turkey’s (TCMB) decision to cut the overnight lending rate by 25 basis points to 8.25%. As the central bank continued its monetary loosening cycle the GBP TRY exchange rate was prompted to plunge to a fresh monthly low of 3.8456, although the currency pair rapidly rebounded from the shock.
Stronger Business Confidence Forecast to Boost TRY
The Lira could find further support in the near future if domestic data continues to point towards economic resilience. Monday’s business confidence and capacity utilisation figures are both forecast to show an uptick in September, indicating that the impact of the attempted coup has faded further. However, if risk appetite fails to hold up given the Fed’s willingness to raise interest rates before the end of the year then the GBP TRY exchange rate could strengthen further.
Demand for the Pound could pick up more substantially providing that the BBA Loans for House Purchase report signals that the domestic housing market remains robust. Higher levels of mortgage approvals would indicate greater confidence amongst both consumers and lenders, something that could prove strongly encouraging for Sterling. A strong results would seem to give the Bank of England (BoE) less reason to cut interest rates again, likely prompting the GBP TRY exchange rate to continue climbing away from its recent lows.