USD/TRY back above 17.00 as Erdogan pledges to keep cutting rates

Turkish lira continues to weaken against the US dollar

USD/TRY is up over 4% so far this week, adding up to almost 15% gains in the last month.

Turkish President, Recep Tayyip Erdogan’s reluctance to acknowledge the need to control soaring inflation, which reached 73% last month, is causing the value of the lira to deteriorate.

Speaking after a cabinet meeting on Tuesday he dismissed the need to raise interest rates and vowed to continue cutting them in an effort to ease the pressure on consumers, as he believes inflation is just one of several problems that should begin to ease next year. He believes that the use of high borrowing costs to supress consumption is misguided.

His obsession with ultra-low rates, which he forces upon the central bank’s guidance, only adds more pressure to rising prices, creating a vicious cycle which is causing the central bank’s FX reserves to plunge.

The rise in food and energy prices is the main issue the Turkish economy is facing, which has been exasperated by the war in Ukraine.

Turkey imports over 90% of the energy it consumes, and the continued drop in the lira is only making imports more expensive, meaning the central bank must compensate domestic consumers in order to avoid appetite for foreign currencies.

The outlook for the Turkish lira remains very weak as long as Erdogan continues to play out his own inflation mandate. Especially at a time when most other central banks around the world are ramping up their monetary tightening in an attempt to make up for lost time that let consumer prices reach over 40-year highs in many countries.

The drop in FX reserves means the lira is facing a currency crisis, and the outlook for USD/TRY seems to be a one-way street towards the highs seen in December last year when Erdogan announced that a series of rate cuts would take place.

USD/TRY chart

The weekly chart is showing a clear bullish pattern of higher lows, forming an ascending trendline that is acting as support.

The weekly highs have also been breaking higher but the distance in the new peaks is shortening, meaning there is some resistance along the way.

There is a lack of clear resistance areas heading up to the December 2021 high given the magnitude of the move back then, but buyers should watch out for the area around 17.1829 as that was the weekly high on the week of the 13th of December 2021 before the move towards the high of 18.4372.