The Turkish lira collapsed to a record low against the US dollar even as signs emerged that the Federal Reserve would slash interest rates in September. The USD/TRY exchange rate soared to 34, bringing the year-to-date gains to 16%.
It has also dropped against other currencies. The EUR/TRY pair has jumped by over 17% this year to trade at 38 while the GBP/TRY surged to 45. Most notably, the Turkish lira has also plunged against Bitcoin, with the BTC/TRY rising by more than 60% this year.
Turkish lira not boosted by the USD
The USD/TRY pair continued rising even as the US dollar index crash gained steam after the dovish Federal Reserve statement. It dropped to $100.85, its lowest level since January this year and over 6% below its highest point this year.
The greenback has slumped against most developed and emerging market currencies. As we wrote this week, it has fallen by over 8% against the South African rand. It has also plunged against the Indonesian rupiah and Thai baht.
In a statement on Friday, Powell noted that the bank was ready to embrace a monetary policy shift now that the economy has changed. A report released this week showed that the labor market has been softer than expected. It created over 818,000 fewer jobs than believed in the 12 months to March.
Another report by S&P Global revealed that the manufacturing PMI continued contracting even after the trillions that the Biden has pumped to stimulate the sector. Manufacturing and industrial production and housing numbers have been softer than expected.
Therefore, some analysts believe that the Federal Reserve will deliver a 0.25% cut in September followed by two more similar cuts in the next meeting. However, the magnitude of the next cut will depend on the next job data. In a note, Seema Shah, an analyst at Principal Asset Management said:
“The magnitude of the September move will be determined by the August jobs report. But make no mistake, if the labor market shows signs of further cooling, the Fed will cut with conviction.”
In an X post, Mohamed El Erian, who has called the Fed to start cutting rates said:
Ideally, a dovish Federal Reserve should be a good thing for the Turkish lira since it means that investors will start moving to these risky- but high-yielding markets.
Turkish Central Bank risks
The main reason why the USD/TRY has continued rising is that investors have little faith with the Central Bank of the Republic of Turkey (CBRT).
The central bank has maintained interest rates at an elevated level. Just this week, the bank left them unchanged at 50% for the fifth consecutive meeting. In recent statements, the central bank governor has hinted that bank would hold rates steady for a while until inflation slows.
Analysts now expect that the bank will start cutting interest rates in 2025. However, there is also a risk that President Erdogan will intervene and even fire the governor as he has done in the past. Besides, recent data showed that inflation has dropped for two consecutive months. It moved from 75.45% in May to 71.6% in June and 61.78% in July.
USD/TRY technical analysis
In my last articles on the Turkish lira, I expressed hopes that the currency would bounce back, citing the rising wedge pattern that has been forming. In most cases, this is one of the most bearish patterns in the market.
This prediction did not work out as the pair has continued rising and retested the key resistance point at 34. Therefore, there are signs that the pair will continue rising as buyers target the next point at 35.
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