The Turkish lira crashed to a record low after Donald Trump’s swearing-in and as traders wait for the next interest rate decision. The USD/TRY exchange rate rose to a record high of 35.60, up from this year’s low of 35. So, how low can the Turkish lira crash get this year?
CBRT interest rate decision
The Turkish lira will be the top emerging market currency to watch this week as the central bank concludes its one-day monetary policy meeting.
Analysts expect the bank to continue the trend it started in its last meeting by cutting interest rates. The bank slashed interest rates by a whopping 250 basis points, higher than analysts expected.
This trend will continue this week, with analysts expecting another 250 basis point cuts from 47.50% to 45%. The bank could deliver a bigger rate cut than that. It will also cut the overnight lending and borrowing rates to 42% and 48%.
The odds of a big rate cut rose after the country released encouraging consumer inflation data this month. According to the statistics agency, the headline consumer price index (CPI) dropped to 44.38% in December from 47% a month earlier.
Turkey’s inflation has been in a strong downtrend after peaking at 75.45% in May last year. This trend may continue this year, but cutting interest rates could stimulate more inflation in the near term.
The bank hopes that its interest rate cuts will help boost a slowing economy. The most recent numbers showed that the Turkish economy grew by 2.1% in the third quarter, the lowest increase since Q2 ’20, at the height of the COVID-19 pandemic. However, it also contracted by 0.2% quarterly.
Another recent data also showed that Turkey’s current deficit increased in November as trade numbers worsened. The account deficit was $2.9 billion, while the 12-month rolling deficit widened to $7.4 billion or 0.6% of the GDP.
The USD/TRY exchange rate rose amid the divergence between the US and Turkey. In the US, Fed has delivered three interest rate cuts and hinted that more of them are coming.
However, most analysts anticipate that the bank will deliver just two cuts this year because of the substantially higher inflation rate. The most recent data showed that the headline Consumer Price Index (CPI) rose from 2.6% in November to 2.7% in December.
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 for a long time. This week, after Donald Trump’s inauguration, it jumped to a record high of 35.62.
The pair has remained above the 50-day Exponential Moving Average (EMA), signaling that bulls are in control.
On the positive sign for the Turkish lira, the USD/TRY pair has formed an ascending broadening wedge pattern. In most periods, this pattern usually leads to a bearish reversal. If this happens, the next level to watch will be at 35. The challenge for using the rising wedge in trading is that its signal can take a long time to form.
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