The Turkish lira dropped to a record low last week as the US dollar strength continued. The USD/TRY exchange rate surged to a high of 34.60, which was significantly higher than 29.7, where it started the year. It has soared by over 500% in the last five years, making lira to be one of the worst-performing currencies globally.
CBRT interest rate decision ahead
The USD/TRY exchange rate continued its uptrend after the recent Turkish inflation data. According to the statistics agency, Turkey’s inflation continued moving downwards in October, helped by the falling energy prices.
The headline consumer price index dropped to 48.58% from the previous 49.38%. This decline was, however, smaller than the median estimate of 48.20%.
Inflation dropped to 49.38% a month earlier, also smaller than the expected 48.30%. Still, this trend is encouraging since the headline CPI peaked at 85.5% in 2022. Analysts believe that Turkey’s inflation will continue falling and end the year around 40%.
The next important catalyst for the USD/TRY exchange rate will be the upcoming CBT interest rate decision. Based on its recent statement, economists expect the bank to maintain rates unchanged at 50%.
In the last meeting, the bank left rates unchanged, but maintained a fairly hawkish tone, citing strong inflation. As such, analysts now believe that the CBT will wait until early next year to cut rates.
The USD/TRY, therefore, soared because analysts expect that the bank will start cutting rates prematurely. In an ideal situation, it should wait for longer to start slashing rates since inflation remains stubbornly high.
The challenge, however, is that the continued high rates have angered President Erdogan, who has always hates high rates. Unlike in other countries, he has the power to hire and fire CBT officials.
Read more: USD/TRY: As the Turkish lira slips, will it stage a yen-like rally?
US dollar index strength
The USD/TRY pair has also rallied after the US dollar index (DXY) continued its strong uptrend. It rallied to $107, its highest level in months, and 7% above the current level.
The DXY has soared because of the recent election of Donald Trump in the United States and the potential changes.
Trump has pledged several actions that could lead the Federal Reserve to be more hawkish for a while. He wants to introduce higher tariffs on imported goods, a move that will see prices rise in the US.
Also, he wants to deport millions of undocumented migrants, which will lead to more labor shortages and inflation. Besides, these migrants work in some labor-intensive industries like construction and agriculture.
The USD/TRY has become a popular carry trade recently, especially after experiencing some stability. A carry trade is a situation where investors borrow a low-interest-rate currency and invest in a higher-yielding one.
In this case, traders have started borrowing the lower-yielding US dollar and investing in the higher-yielding Turkish lira.
USD/TRY technical analysis
USD/TRY chart by TradingView
The weekly chart shows that the USD to TRY exchange rate has been in a steady uptrend in the past few years.
Recently, however, it has remained in a fairly consolidation phase. It has also formed a small ascending triangle pattern, which is a popular bullish sign.
The pair has moved above all moving averages, while the Relative Strength Index (RSI) has remained above the overbought level.
Therefore, because of the triangle pattern, the pair may soon have a bullish breakout, with the next point to watch being at 36. The stop-loss of this trade will be at 34. A drop below that level will point to more Turkish lira strength.
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