Sharp Drop in UK Retail Sales Causes GBP TRY Exchange Rate to Retreat

An unexpectedly strong uptick in the UK consumer price index set the GBP TRY exchange rate on a bullish run, putting increased pressure on the Bank of England (BoE) to consider raising interest rates. As the BoE did then opt to take a more hawkish view in the meeting minutes released on Thursday this encouraged the Pound to extend its gains further.

No Surprises from CBRT Policy Decision

The Central Bank of the Republic of Turkey (CBRT) left interest rates on hold at its September policy meeting, meanwhile, in line with market expectations. Policymakers expressed confidence in the Turkish economy, noting that the recovery has gained strength thanks to a combination of domestic and external demand.

Even so, the CBRT still highlighted the persistent risk that high inflation poses to the domestic economy. With monetary policy likely to remain tight for the foreseeable future the appeal of the Lira remained somewhat limited, especially in the absence of any wider market demand for risk-sensitive currencies.

A widening of the Turkish current account deficit also put pressure on the Lira ahead of the weekend, undermining confidence in the strength of the domestic economy. As Turkey struggles to reduce its deficit this limits the upside potential of TRY exchange rates, suggesting that the country remains vulnerable to any deterioration in trade conditions.

Regional Politics Limit Lira Demand

Political tensions put downside pressure on the Lira on Tuesday as the Turkish military carried out exercises near the border with Iraq. Jitters have continued to mount even after Iraq’s supreme court ordered the suspension of next week’s planned referendum on the independence of Iraqi Kurdistan, with markets still wary of the potential for violence.

Any escalation in tensions within the region are likely to boost the GBP TRY exchange rate, even if the impact on Turkey itself proves to be minimal. Thus, even if worries over North Korea continue to ease this is unlikely to particularly bolster the appeal of the Lira, at least in the short term.

GBP Rates Remain Weighed Down by Brexit Uncertainty

Brexit has continued to dominate the outlook of the Pound, on the other hand, as a fresh row broke out in response to comments from Foreign Secretary Boris Johnson. With the Cabinet still seeming to lack a unified approach to Brexit this naturally raised concerns over the likely outcome of negotiations.

Further volatility is likely in response to Theresa May’s latest speech on the subject, with the Prime Minister due to speak in Florence on Friday. Unless May shows some softening of her stance towards negotiations then fears of a hard Brexit could continue to mount, denting the GBP TRY exchange rate in the process.

Wednesday’s UK retail sales data could also provoke jitters for Sterling, with forecasts pointing towards a stagnation in sales on the month. Given the significant role that consumers play in domestic economic growth any weakness here is likely to reduce the chances of the BoE actually following through with an interest rate hike before the end of the year.

Hannah Wilson

Contact Hannah Wilson