Aside from the euro continuing to receive aggressive punishment ahead of the ECB interest rate decision and President Mario Draghi unveiling further details regarding the imminent QE program, the other major talking point has been China lowering its growth target to 7% this year. The GDP downgrade came as no surprise, because continual economic data is pointing towards slower domestic momentum leading to reduced economic growth. However, I am surprised that the inflation target has been set at 3%, which appears ambitious considering it is current looking like inflation levels globally are going to remain below expectations for quite some time. What this has made me wonder is that despite the People’s Bank of China (PBoC) unleashing a variety of different easing measures over the past few months, it might continue to ease monetary policy further throughout the year.
The substantially lower inflation levels being encountered across many economies are an interesting topic at the moment because although the dramatic decline in the price of oil has contributed largely to this, I also think there is another factor that could be in play. For example, the drop in the value of the euro over the previous nine months would have also led to lower inflation, due to imports becoming cheaper. All forecasts are pointing towards the repeated strain the euro is facing being set to become a continual trend and for this reason, I am not ruling out the possibility of a variety of central banks agreeing to purchase the euro at some point. This would not just be limited to the rumours regarding the Swiss National Bank (SNB) setting a new minimum exchange rate, considering both US and UK exporters must be hurting right now.
Elsewhere, I do think that we saw our first indication from the Federal Reserve Beige Book released yesterday evening that Fed could be a little more concerned about the decline in the price oil than it previously indicated. According to the Federal Reserve Beige Book, lower oil prices and the stronger USD were weighing on some aspects of the economy, with energy exploration suffering due to reduced demand as a result of lower oil prices. As a result of this, the price of WTI Crude has jumped to a fortnight high at $52.06. This doesn’t mean WTI Crude is going to go on a remarkable recovery, mainly due to the continual repeated over supply and reduced demand fears limiting how high the bulls can push the price of oil.
The Turkish Lira is receiving another blasting today. To be honest, we could be experiencing a repeat of the repeated battering the Ruble faced with the Lira taking its place. There are just so many different factors weighing on the currency and as long as the USD is not widely sold, we are probably going to see the USDTRY extending way beyond 2.65. Central bank independence has been questioned after President Erdogan pulled no punches and publically criticizing the central bank, while demanding further interest rate cuts. Erdogan has been explicit in suggesting interest rates should be at least 1% lower and with manufacturing activity recently falling to a seven-month low, there probably will be another interest rate cut.
Written by Jameel Ahmad, Chief Market Analyst at FXTM.
Follow Jameel on Twitter @Jameel_FXTM
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