SAFAKNA TURKEY – Over the past 2 days, statements by Fed Chairman Jerome Powell to the Senate Banking Commission have marked global markets. While Powell was more hawkish on the first day of his presentation, he was a little more careful yesterday. However, two days later there was a significant change in expectations for the Fed, which will announce its interest rate decision on March 22.
Powell said on the first day of his presentation here that the Fed is likely to have to raise rates more than expected in light of the latest data. Saying they are ready to take “big steps” as the Fed, Powell said: “The latest economic data came out stronger than expected. “This indicates that final interest rates may be higher than previously thought.” Powell added that one of those moves could be a return to the higher rate hikes from the 25 basis points previously announced by officials.
In his ongoing presentation yesterday, Powell reiterated that they are ready to step up the pace of interest rate hikes if the backbone of data shows that faster tightening is needed, and said, “I emphasize that a decision on this has not yet been made.”
INCREASE BY 50 BASE POINTS INSTEAD OF 25.
Prior to these announcements by Powell, the Fed had largely expected a 25 basis point hike on March 22. However, following the announcements, a 50 basis point increase in pricing began. In the CME FedWatch Tool, which was created to predict the Fed’s monetary policy decisions given current data and explanations, the 25 basis point increase was 69 percent, while the 50 basis point increase was a possible 31 percent prior to the announcement. Following the announcement to date, the probability of a 50 basis point increase has increased to 76.4%, while the probability of a 25 basis point increase has decreased to 23.6%.
US bond yields rise
Prior to Powell’s announcement, the yield on 10-year US Treasuries was 3.94 percent. More than 4 percent were seen during statements, and then there was a retreat to 3.99 percent. The 2-year Treasury yield rose from 4.91 percent to 5.06 percent as a result of the announcement.
CLIMBING THE DOLLAR INDEX
These events led to the global strengthening of the dollar. The dollar index, which measures the behavior of the dollar against major currencies, was at 104.6 prior to Powell’s announcement. The dollar index has stabilized around 105.6 this morning after 105.8. In other words, there was a global strengthening of the dollar by 0.95 percent.
The effects of this have also been seen in EUR/USD parity. The euro/dollar pair, which broke 1.07 on Monday, was trading at 1.0556 this morning.
The impact of a stronger dollar on gold prices was negative. Gold traded at $1,846 an ounce on international markets on Monday. This morning, the price per ounce was trading at $1,810 after falling to $1,810 yesterday. In the domestic market, the price of a gram of gold was reduced from 1.121 lira to 1.104 lira.
CRYPTO COINS INJURED
The growth of assets in the US also led to sell-offs in the cryptocurrency market. Prior to Powell’s announcements, bitcoin was hovering above $22,350. Throughout yesterday, Bitcoin struggled to hold above $22,000. However, this critical level was broken last night. As of this morning, Bitcoin was trading at $21,775, down 1.1% on a daily basis. Similarly, Ethereum dropped from $1,575 to $1,538 due to the impact of Powell’s statements.
LIMITED EFFECT IN TL
Domestically, the impact of Powell’s statements on the exchange rate was limited. Prior to the announcements, USD/TL was trading at around 18.92. This morning the dollar exchange rate was 18.95 lira. The Euro/Turkish lira, on the other hand, fell from 10.15 to 20.01 with a parity effect.
ELECTION SCENARIOS FROM WELLS FARGO
American financial giant Wells Fargo has published an assessment report that includes 2 different scenarios for the upcoming elections in Turkey.
Wells Fargo analysts, who said in the report that the “baseline scenario” was based on the re-election of President Erdogan, said: “We think Erdogan can get enough support with financial support, despite problems in the economy and new problems caused by the earthquake.” Financial support can improve the economic situation and ensure long-term optimism of the electorate. Despite this, we think that the likelihood of this scenario is decreasing, and the likelihood of a regime change is increasing,” he said.
EXPECTATIONS IF PRESIDENT ERDOGAN WINS
The report after these assessments presented predictions of what could happen in the markets in two different scenarios. According to Wells Fargo analysts, the probability of a scenario in which President Erdogan wins the election is in the range of 55-60 percent. In this scenario, the stable dollar exchange rate, around 19 lira, was projected to continue with interventions in the foreign exchange market until the end of the second quarter. However, in the longer term, the Turkish lira is expected to depreciate in the second half of 2023 and 2024 due to the decrease in foreign exchange reserves and the lack of changes in monetary policy. In the above scenario, Wells Fargo expects the dollar/Turkish lira to rise to 19.5 in the last quarter of the year and to 20 in mid-2024.
EXPECTATIONS IN THE EVENT OF THE NATIONAL ALLIANCE VICTORY
There are different assessments of the “regime change” scenario in which the “Alliance of Nations” won the elections. Bank analysts predict that the Turkish lira will rise by 20 percent in this case, and it is expected that more reliable and traditional policies will be implemented by the end of the second quarter of 2023. In the longer term, the Turkish lira is expected to continue to strengthen with a tight monetary policy of the Central Bank of the Russian Federation, which will act on its own, and, possibly, a transition to a positive interest rate in real terms. In this scenario, in which capital inflows to TL assets are expected to increase, the dollar is expected to end 2023 at 15 lira and decline to 14 lira in mid-2024.
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