New Turkish Economic Plan Disappoints Markets and is Seen as a Damp Squib Causing Further Lira Losses
Unfavourable market reaction to Turkish Finance Minister Berat Albayrak’s newly announced three-year economic programme saw the Turkish Lira slump sharply across the board.
Investors were not impressed by Albayrak’s reform plan, questioning the achievability of the country’s latest growth targets and whether the proposals go far enough in tackling the debt issue.
With it looking unlikely the Central Bank of the Republic of Turkey (CBRT) will take further policy action in the near future, questions remain over Turkey’s ability to avoid an economic recession.
Nevertheless, the Pound Sterling to Turkish Lira (GBP/TRY) is struggling to capitalise on this latest bout of Lira weakness ahead of the weekend, on broad Pound weakness caused by the latest Brexit turmoil.
As a result, the GBP/TRY exchange rate was unable to climb back to its earlier weekly interbank rate high of 8.46, although the pairing remains substantially stronger than it was at the start of August.
GBP/TRY Exchange Rate Falters as EU Leaders Reject Chequers Proposals
In the background, GBP/TRY exchange rate gains remain fragile as the threat of a no-deal Brexit continues to hang over the UK economy.
Confidence in Pound Sterling (GBP) generally weakened this morning after EU leaders rejected Theresa May’s Chequers proposals at the end of the Salzburg summit.
With the two sides still being at an impasse, and the issue of the Irish border still up in the air, the odds of the UK leaving the EU in March 2019 without any deal in place have risen.
This left investors in a more bearish mood ahead of the weekend, especially in the wake of disappointing August public finance data.
If the Bank of England’s (BoE) Quarterly Bulletin also shows signs of caution regarding the domestic outlook the mood towards the Pound is likely to deteriorate further, to the Turkish Lira’s advantage.
Hawkish Federal Reserve to Increase Pressure on Vulnerable Turkish Lira (TRY)
But more trouble could be in store for the Turkish Lira in the days ahead as investors brace for the Federal Reserve’s September policy announcement.
While an interest rate hike is already effectively priced into markets the Fed meeting could still prompt investors to further pile out of the Lira if policymakers adopt a more hawkish outlook.
Signs that the Fed is likely to continue tightening monetary policy in the months ahead would put fresh pressure on the Turkish Lira and emerging market currencies in general.
However, if the US Dollar (USD) falls out of favour this could offer a respite to TRY exchange rates, even though confidence in the Turkish economy remains limited.
Until investors see concrete evidence that Turkey is navigating its way out of its crisis demand for the Turkish Lira is unlikely to pick up substantially.
Brexit Tensions to Weigh on GBP/TRY Exchange Rate Ahead of Conservative Party Conference
Persistent Brexit tensions could drive the Pound Sterling to Turkish Lira (GBP/TRY) exchange rate further from its recent highs.
With embattled UK Prime Minister Theresa May under increasing pressure ahead of the Conservative Party conference, the Pound is likely to remain on a weaker footing against its rivals.
As support for May among Conservative MPs remains fragile the increasing threat of a leadership challenge could encourage investors to sell out of the Pound in favour of its rivals.
In fact, it looks likely that British political developments will have a significant impact on the Pound Sterling to Turkish Lira (GBP/TRY) exchange rate for some time to come.