FX Markets - central bank decisions

The markets are eagerly anticipating today's central bank decisions. With the UK, Norway & Switzerland assessing whether to adopt a 25bps or 50bps hike in policy rates, investors are closely watching if policymakers will opt for a more conservative or aggressive approach.

Another central bank that will be in focus is the Central Bank of Turkey, which is expected to return to conventional policy and large rate hikes after a period of unorthodox and erratic monetary policy that led to high inflation and currency depreciation. The Turkish lira could benefit from a more credible and consistent policy stance that would restore market confidence and reduce external vulnerabilities.

In Turkiye, it is expected to mark a return to conventional policy and possibly implement a large hike.

There are two possible outcomes of a more aggressive foreign policy. Firstly, it could decrease the dollar's value through a reduction in the interest rate differential and the appeal of dollar-based investments. Alternatively, tighter monetary policies in other countries could harm global growth and risk-taking, increasing demand for safe currencies such as the dollar

In this newsletter

• EURUSD
• GBPUSD
• EURGBP
• USD/TRY (Turkish lira)

EURUSD

Recently, the EUR/USD currency pair has shown a positive trend, prompting people to change their portfolios. Despite no significant changes in the short-term EUR/USD exchange rates, the pair has performed well.

This week's EUR/USD rate has remained stable, with a projected increase to approximately 1.101. It may even reach 1.11 if it surpasses this threshold. However, if the US economic data does not perform well, the EUR/USD rate could potentially rise even further.

It's important to pay attention to June's consumer confidence data and the statements of European Central Bank officials, as they could offer valuable insights across the Atlantic. Currently, it appears that the prospect of two additional interest rate hikes of 0.25% each by the year's end is being received with relative calm.

We can discuss the Swiss people now. Today, the Swiss National Bank (SNB) is holding a meeting to determine their interest rates. Many economists predict a 0.25% increase, while others believe they may opt for a more significant 0.50% increase due to the limited number of meetings held each year. Despite a decrease in their core inflation rate to below 2% in the past year, the SNB seems inclined towards raising rates.

During the previous autumn, it was believed that the Swiss National Bank (SNB) intended to maintain a stable Swiss franc (CHF) value by increasing it by 5% annually. While this did occur to some extent, it was primarily due to fluctuations in USD/CHF rather than EUR/CHF.

The SNB may adopt a stern stance today, possibly causing a reduction in the USD/CHF exchange rate and aiming for the low of May, which was 0.882.

GBPUSD

So, today is a big day. The Bank of England (BoE) is expected to raise interest rates as they're dealing with this second round of inflation, and politics are getting pretty heated. The foreign exchange options market is expecting a 70-pip range for the pound-to-dollar (GBP/USD) rate today - but honestly, this seems a bit too small to me.

It might be "too soon" for the BoE to start fighting against the super-aggressive expectations of higher interest rates that are being baked into the UK money market curves right now.

People think the Bank Rate could be almost 1.5% higher at 6.00% early next year. If the BoE increases rates by 0.25% and doesn't fight the current trend, the pound could stay pretty strong.

But what's been noticeable this week is that the pound hasn't been going up with short-term UK rates. This could mean investors are thinking ahead about the tough times coming for the UK economy and markets.

All things considered, EUR/GBP rate has started to climb this week and could easily go back to 0.88 in the next few months.

The GBP/USD rate will likely remain strong due to the weaker dollar. However, if the Bank of England provides a less optimistic outlook on raising rates than anticipated, we predict that people may begin buying below 1.27

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Turkiye

Looking ahead to EMEA's upcoming week, it is anticipated that the Central Bank of Turkey will increase its one-week policy rate from 8.50% to 20% today.

The EMEA week ahead is a series of articles that provide a preview of what’s on the agenda around the world in the region of Europe, the Middle East, and Africa. One of the topics that analysts will closely watch is the monetary policy decision of the Central Bank of Turkey on June 22.

It is anticipated that the Central Bank of Turkey (CBT) will increase the one-week policy rate from 8.50% to 20% as a measure to control inflation and stabilize the Turkish lira. This move marks a considerable shift towards orthodox policy (higher rates) following the recent changes in the economic team by the re-elected President Erdogan, who has expressed his endorsement for stricter monetary policy.

There are various implications to consider regarding this decision. Firstly, it may enhance investor confidence in Turkey, leading to increased capital inflows and a decreased risk of balance-of-payments crisis. However, it could also hinder economic growth and escalate the debt burden of households and businesses that have taken out foreign currency loans. Some of Erdogan's supporters may view this as a submission to external pressure and react politically.

The implied yields of TRY from one-month FX forwards have decreased significantly, from a peak of over 100% in May to only 19% at present. This pattern may potentially change if the CBT fails to fulfill its commitment to increase rates or if tensions in the region escalate further. To stay abreast of the situation, analysts will closely observe the CBT's communication and actions in the weeks ahead and the reaction of Turkish officials and the general public to the prospect of a rate hike.

If the CBT (Central Bank of Turkey) decides to really jack up interest rates today, we can probably expect the USD/TRY to stay calm.

But I don't expect it to drop a lot or will make a fundamental turn. Why? Well, if the lira gets stronger from the rate hike, the local authorities running might take that opportunity to stock up on foreign currencies.

This would mean they'd be buying up dollars and selling liras, which could push the USD/TRY rate back up a bit.

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