The USD/TRY exchange rate continued its uptrend and reached its all-time high amid a potential divergence between the Federal Reserve and the Central Bank of the Republic of Turkey (CBRT). The Turkish lira has crashed by over 18% in the last twelve months, making it one of the top laggards in the forex market.
However, its total performance in real terms, which includes interest rates, was over 30%, making it the second-best performing currency after the Argentinian peso. So, is lira a good currency to buy in 2025 as ING analysts forecast a plunge to 43?
CBRT has started cutting interest rates
The USD/TRY exchange rate remained on an uptrend as the CBRT and the Federal Reserve diverged on interest rates.
The CBRT expressed a dovish sentiment in the last meeting when officials slashed interest rates by 250 basis points to 47.5%. They also slashed overnight borrowing and lending rates by the same amount.
Officials maintained a neutral stance in that meeting and hinted that they would maintain their data-dependence.
Data released since then showed that the country’s inflation continued to fall in December. According to the statistics agency, the Consumer Price Index (CPI) fell from 47% in December to 44.38% in December. That big drop was lower than the median estimate of 45.20%.
It was also a bigger drop than the 2023 high of 84.5%, and a sign that the country is beating inflation. Still, it has the highest one of the highest inflation rates globally.
Therefore, with Turkey’s inflation falling, the central bank is likely to deliver more rate cuts this year.
These cuts are mostly because Turkey’s president, Recep Erdogan, dislikes high rates even when they lower inflation. Also, there are signs that the Turkish economy is not doing well.
For example, the most recent data showed that Turkey’s budget turned into a large surplus last year as corporate tax revenue fell. The budget deficit rose to 5.2%, a measure which the government aims to address by increasing some taxes.
Carry trade opportunity remains
The USD/TRY pair has become one of the best carry trade opportunities in the forex market. In a carry trade, investors borrow money from a low-interest-rate country and invest in a higher-yielding one.
In this case, there has been signs that many investors have continued to borrow money from the United States and invest it in Turkey.
The USD/TRY pair will remain a carry trade opportunity because of the wider spread between the two countries. Turkey is cutting rates, while the Federal Reserve has hinted that it will deliver fewer interest rate cuts this year.
The Fed has slashed rates by 1%, and analysts anticipate another 0.50% cut this year. The next key data to watch will be the upcoming US Consumer Price Index (CPI), which will come out on Wednesday.
Analysts expect the data to show that the headline CPI remained steady in December, rising to 2.9% from the previous 2.7%.
USD/TRY forecast
USD/TRY chart by TradingView
ING analysts are still bullish on the USD/TRY exchange rate. In a note, they predicted it may surge to 43 by the end of the year, saying:
“We believe that TRY should remain the main carry trade in the EM space this year. We expect 36.85 USD/TRY for the end of the first quarter and 43.00 for the year-end.”
Technicals show that the USD to TRY exchange rate has continued rising in the past few years even though the momentum has eased recently. It has remained above the 50-week and 100-week Exponential Moving Averages, a sign that bulls are in control.
Therefore, the USD/TRY pair will likely continue rising as bulls target the next key resistance point at 36 followed by the ING target of 36.85.
Read more: USD/TRY: As the Turkish lira slips, will it stage a yen-like rally?
The post USD/TRY forecast: ING experts see Turkish lira falling to 43 appeared first on Invezz