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Turkish troubles rumble on

The political and economic uncertainty in Turkey is still hanging over the markets as Asian stocks declined heavily overnight.

President Erdogan of Turkey, is showing no sign of backing down against the US. The Turkish leader declared that the country is engaged in an economic ‘war’, and has ruled out hiking interest rates. Matters were made worse on Friday by President Trump, who doubled the tariffs on aluminium and steel that are imported from Turkey.

The Turkish lira has taken a battering, and the banks in Turkey who have borrowed in euros might struggle to repay their loans if they haven’t hedged their position. Some eurozone banks have substantial shareholdings in Turkish bank, and should the default rate rise in Turkey, it could have a knock on effect around Europe.  

It looks like the eurozone banking system is set for another period of turmoil as the exposure that some Spanish and French banks have to Turkey could hurt confidence in the region. European banks have enough to worry about with their own non-performing loans, and let alone Turkey’s weakened loan books. When it comes to the health of banks, traders usually steer clear of stocks and seek out safe-haven assets such as government bonds or the Japanese yen.

Overnight, EUR/USD fell it its lowest level since July 2017, and the slide in the euro on account of the weakness in Turkey has driven the US dollar higher. President Trump would like a softer greenback in order make US products more competitive, so he won’t be best pleased. The ‘flight to quality’ is likely to keep the US dollar in demand too. US headline inflation remained at 2.9%, but economists were expecting it to rise to 3%. The core inflation rate ticked up from 2.3% to 2.4% - meeting expectations. The increase in the core report underlines the rise in real demand, and that is likely to keep the Fed on their monetary tightening policy, and in turn keep demand for the greenback high. 

Gold caught a bit of a rally on Friday as the ‘flight-to quality’ play superseded the firm US dollar. In recent months, the inverse relationship between the two markets has been strong, but on Friday the ‘safe haven’ status of gold took over. This morning the metal is slightly in the red, and there appears to be support in the $1,204 - $1,207 region. 

The robust GDP figures from the UK at the back end of last week, stemmed the slide in the pound. On a quarterly basis the British economy grew by 0.4% - meeting expectations, and it was an improvement on the 0.2% growth in the first three months of the year. The uncertainly of a ‘no-deal Brexit’ is likely to weigh on the pound, and traders could remain cautious until there is more clarity around the UK’s plans post leaving the EU.  

According to the Baker Hughes report, there were 10 additional active rigs in the US last week, bringing it to a total of 869. The relatively weak oil price didn’t stop a jump in active rigs. Major oil providers are clearly keen to boost production, but the heightened trade tensions between the US and China are causing concern about future demand.

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 109.96 – the 200-day moving average.

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