The USD/TRY exchange rate has surged to a record high as the US dollar index (DXY) soared and as the Central Bank of the Republic of Turkey (CBRT) prepares to cut interest rates. The pair soared to a high of 35.25, up by about 22% this year.
CBRT interest rate decision
The USD/TRY exchange rate will be the key forex pair to watch this week as the CBRT concludes its two-day monetary policy meeting.
Economists polled by Reuters expect the bank to deliver its first interest rate cut of the year this time. Most analysts see it slashing by 250 basis points, a move that will bring the benchmark interest rate to 47.5%.
The rate cut comes even as Turkey’s inflation issues continue. While the headline Consumer Price Index (CPI) has retreated from 71.60% in July to 47.09%, the recent pace of slowdown have not been as quick as expected.
The most recent data showed that the headline Turkish inflation dropped from 48.58% in December to 47% in November. That decline was lower than the median estimate of 46.60%.
In October, Turkey’s inflation dropped to 48.58%, also higher than the expected 48.20%, while a month earlier, inflation fell to 49.38%. These numbers mean that Turkey still has one of the highest inflation rates globally.
Therefore, cutting interest rates now may make the already bad situation worse. It may also lead to some credit downgrades from the top credit rating agencies.
Central banks typically maintain high interest rates when inflation is high to slow down spending. This partly explains why the Turkey’s inflation has fallen from over 75% in May to today’s 47%. As such, there is a likelihood that prices will resume their uptrend in 2025.
The CBRT will cut rates because of the slowing Turkish economy. The most recent numbers showed that the economy grew by 2.1% in the third quarter, missing analysts estimates as businesses complained about the soaring borrowing costs. In a note, analysts at Citi said:
“The combination of growing evidence of an economic slowdown and historically tight financial conditions faced by bank-dependent borrowers also lends support to our view that a 250bp cut in December is likely. However, we concur that a less aggressive easing cannot be entirely ruled out.”
Strong US dollar
The USD/TRY exchange rate has surged because of the strong US dollar index, which has jumped to over $108. Its 8% rally from its lowest level this year happened because of the fairly strong US economy, which has avoided a hard landing.
The dollar rose after the Federal Reserve made its last interest rate decision of the year on Wednesday last week. It slashed interest rates unchanged by 0.25% as the dot plot pointed to two more cuts in 2025.
As a result, the Turkish lira has joined other emerging market currencies in a strong downtrend as the dollar surges. For example, the Brazilian real has crashed to a record low, while other currencies like the Chinese yuan and Russian ruble have slipped.
USD/TRY technical analysis
USD/TRY chart by TradingView
The daily chart shows that the USD/TRY exchange rate has been in a strong uptrend, and is sitting at a record high of 35.25. It has moved above the upper side of the rising wedge, a popular bearish reversal sign.
The pair has remained above all moving averages. Also, all oscillators have continued rising, a sign that the pair is gaining momentum. Therefore, the path of the least resistance is higher, with the next level to watch being at 35.
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