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What Next For Turkish Lira After The Recent CBRT Meeting?

May 26, 2022

The Turkish lira continued its downward trend ahead of the upcoming interest rates by the Central Bank of the Republic of Turkey. The USD/TRY pair rose to a high of 16.36, which was the highest level since December 20th last year. It has risen by more than 60% this year, making lira the worst-performing currency in the emerging markets.

The CBRT will conclude its two-day meeting Today. And we will be watching for the potential change of tone by the bank as inflation soars.

Reuters expect that the bank will leave its interest rate unchanged at 14%. It will also leave the overnight lending and borrowing rates intact at 15.50% and 12%, respectively. 

The decision comes at a time when the Turkish lira is showing uneven recovery. Data published three weeks ago showed that the country’s headline consumer price index rose to nearly 70% in April. This increase was triggered by the relatively weaker Turkish lira and the rising energy prices. It was also the highest jump in consumer prices since 2000. 

Additional data revealed that the country’s industrial output declined for the second straight month while retail sales cratered to the lowest level in 15 months. 

And we expect that the situation will worsen unless the CBRT intervenes. In an ideal situation, central banks tend to hike interest rates in a period of high inflation. The goal is to limit the spread of cash by incentivizing saving. Higher rates also help to slow the economy down slightly. 

Instead, the CBRT did the opposite by cutting rates by 5 percentage points last year. This decision led to more money in the economy chasing fewer goods in a time when there are logistical challenges. Therefore, the USD/TRY pair will likely keep rising as long as the CBRT leaves rates in this level or even sound dovish.

The USD/TRY price has been in a strong bullish trend in the past few months. This week, the pair managed to move above the upper side of the ascending channel that is shown in red. It also rose above the 25-day and 50-day moving averages while the MACD has moved above the neutral level. 

The pair will likely keep rising as bulls target the key resistance level at 20. A drop below the support at 15.73 will invalidate the bullish view.

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