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Turkey and China still in focus

Geopolitics is likely to remain in focus this week as the currency crisis in Turkey is still ongoing.

The slump in the Turkish lira is on traders’ minds as the fear of contagion into the eurozone is likely to remain a dominant theme. It was reported that emerging market funds were already trimming their exposure to the country in July, and that was even before the severe decline in the lira. Over the weekend, the central banks of Qatar and Turkey signed a currency swap agreement, and this follows on from the $15 billion that the gulf state pledged to invest in the country.  

Moody’s and S&P 500 have downgraded Turkey’s debt rating, and this is concerning seeing as it makes international investors less likely to lend to the struggling country. It also, could lead to individual Turkish banks being downgraded, and that would rattle investor confidence even further.Dealers are still scared that banks that have lent money to Turkish finance houses could face defaults, and it is possible we might see an increase in non-performing loans in the Turkish banking system, and that could seep into the eurozone.

Trade talks between the US and China are to be resumed this month, and traders are cautiously optimistic, but just because the meeting has been lined up, doesn’t mean anything will come of it. Some traders view the weakness in the Chinese stock market and currency as a sign that Beijing will be more accommodating when it comes to negotiations. President Trump will feel that he has the upper hand, especially in light of the disappointing economic updates from China last week, so he might try and push the envelope when it comes to the terms of the trade deal. China is the second-largest economy in the world, and a major importer of metals, and the likes of copper, platinum and palladium will be in focus this week. The renminbi is a little firmer overnight, and this bodes well for China.

The US dollar index finished last week on a negative note as traders locked in profits from the greenback’s positive run. The possibility of two more rate hikes from the Federal Reserve this year is keeping the dollar in demand. The fact that the US economy is head and shoulders above other major economies is another factor, and there is a bit of a ‘safe haven’ play too. The situation in Turkey is putting pressure on other emerging market economies, as US denominated loans will equate to higher borrowing costs. 

Gold endured a severe sell-off last week as the stronger US dollar weighed onto the metal. Some traders feel the US central bank will hike rates in September and December, and this is hurting the gold market. The inverse relationship between gold and the greenback is strong, and it is over-powering the ‘flight-to-quality’ effect that gold has historically enjoyed. According to the Commodity Future Trading Commission, speculators’ bearish bets on gold have reached their highest level in 17 years. 

At 7am (UK time) Germany will release the latest PPI report, and on an annual basis the report is tipped to come in at 3%, unchanged from June, and on a monthly basis, the consensus is 0.2%. The PPI update is useful as it can often be a front-runner for the CPI report, as price changes at the producer level can be passed onto the consumer.

EUR/USD – now that it has broken below the 1.1500 region, we could see further losses. Support might be found at 1.1287 or 1.1156. A bounce back might run into resistance at 1.1500 or 1.1663.

GBP/USD – has been in a downtrend since April, and if the bearish move continues it could target 1.2590. Pullbacks might run into resistance in the 1.2957 to 1.3000 region.       

EUR/GBP – has been pushing higher since April and if the bullish run continues it could target 0.9050. A move lower might find support at 0.8900 or 0.8844. 

USD/JPY – the upward trend that began in March is still intact, and if the positive move continues it might target 112.15. Support might be found at 109.88 – the 200-day moving average.

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