FX Market Update: Turkish Lira Gains Ahead of CBRT Decision

Euro falls after the ECB decision

The euro retreated against most currencies after last week’s European Central Bank (ECB) decision. The EUR/USD pair dropped to 1.0882, its lowest point since Tuesday while the EUR/CHF dropped to 0.9675.

On Thursday, the ECB decided to leave interest rates unchanged at 3.75% as was widely expected. The bank also signaled that it would deliver at least two more rate cuts later this year.

These cuts are happening as data show that Europe’s inflation is falling while the economy is recovering slowly. Recent data showed that the bloc’s inflation retreated to 2.5% in June. Another survey data released on Friday revealed that most ECB officials expect inflation to remain below 2% in the next two years.

Central banks cut interest rates in a bid to stimulate growth by making capital affordable to companies and individuals. Lower European rates lead to a carry trade opportunity where investors borrow the euro to invest in the US.

The euro will be muted this week since there is no important European economic data. Therefore, traders will continue to reflect on last week’s ECB decision and its impact.

Canadian dollar braces for key meeting

The Canadian dollar has softened in the past few weeks as a carry trade with the US emerged and crude oil prices retreated.

The USD/CAD pair rose to 1.3747 on Friday, its highest point since July 2nd. It has risen by 1% from its lowest point this month even as the US dollar dropped against most currencies.

The exchange rate will be in focus this week as the Bank of Canada delivers its interest rate decision on Wednesday. Analysts have mixed expectations of this decision. While most of them expect it to leave rates unchanged at 4.75%, others expect back-to-back rate cuts.

Analysts at ING Bank expect the bank to cut rates by 0.25% in this meeting followed by two more later this year. These analysts are concerned about the country’s rising unemployment and the fact that inflation is nearing its 2% target. Their report said:

“High interest costs continue to hurt the household sector with debt service costs as a proportion of income at 30+ year highs, contributing to the Canadian economy likely growing just 1% this year. As such, we expect a further 50bp of rate cuts before year-end.”

ING Analysts

The Canadian dollar is also being affected by lower oil prices as the Brent and West Texas Intermediate (WTI) have retreated for two straight weeks. The currency is often affected by movements in the oil market since Canada is the fourth biggest exporter after Saudi, Russia, and the US.

US dollar rises ahead of PCE data

The US dollar has rebounded in the past two straight days even after Fed officials pointed to rate cuts. The most important statement came from Jay Powell, the Fed Chair, who noted that the bank would cut rates even before inflation hits its 2% target.

He pointed out that the Fed was now more concerned about the labor market as the unemployment rate has risen to 4.1%, its highest point since 2021.

The US dollar will react to two important economic numbers. The statistics agency will publish the first estimate of the GDP data on Thursday followed by the latest Personal Consumption Expenditure (PCE) on Friday.

PCE is the Fed’s favorite inflation gauge because it looks at changes of prices in rural and urban areas. A lower-than-expected PCE figure will increase the chances of a September rate cut, which will lead to a weaker US dollar. In a note, Anna Wong and Stuart Paul of Bloomberg Intelligence said:

“The monthly pace of core PCE inflation will likely be consistent with the 2% target for a third consecutive print. With the labor market cooling, personal income growth slowing, and consumers becoming more discerning in their spending habits, we think the stage is set for a September rate cut.”

Anna Wong and Stuart Paul, Bloomberg Intelligence

Turkish lira crawls back

The Turkish lira, one of the worst-performing emerging market currencies, has bounced back a bit in the past few days. The USD/TRY exchange rate dropped to 33 on Friday, down from the all-time high of 33.17. It remains significantly higher than last year’s low of 25.25.

The lira will be in focus as the Central Bank of the Republic of Turkey (CBRT) delivers its July interest rate decision. In it, the bank is expected to leave rates unchanged at 50% as officials embraces a wait-and-see approach after the encouraging inflation data. According to the statistics agency, the headline CPI dropped at a faster pace than expected in June.

The Turkish lira has fallen sharply in the past decade because of the lack of CBRT independence. Unlike in other countries, the Turkish president can fire the bank’s officials at any time, which has eroded confidence in the currency.

Nigerian naira retreat continues

The Nigerian naira - like many other African currencies, has dropped in the past few years. This sell-off accelerated in 2023 after the new government administered shock therapy by devaluing the currency and ending top subsidies.

Since then, the USD/NGN has soared from less than 700 to over 1,600, triggering runaway inflation in the country. The Central Bank of Nigeria (CBN) has implemented several measures to save the currency.

For example, it has continued to battle street traders who it accuses of helping to devalue the currency. This measure has had some positive impact as the black market rate has tracked the official rate.

The bank has also hiked interest rates and analysts expect that it will hike them from 26.25% to 27.25% this week. In the past, actions by the CBN have had limited implications on the currency, meaning that the NGN could continue falling this week.