USD/TRY forecast: Turkish lira braces for key events

The USD/TRY exchange rate drifted downwards as traders waited for the upcoming Federal Reserve minutes and the upcoming CBT interest rate decision. The USD to Turkish lira pair retreated to a low of 32.2 on Wednesday, down from the year-to-date high of 32.81.

FOMC minutes and CBT decision

The USD/TRY pair will be on the spotlight in the next two days as the Federal Reserve releases its minutes of the last meeting. In it, the bank decided to leave interest rates unchanged between 5.25% and 5.50% and sounded optimistic about cuts. 

These minutes will provide more colour about what these officials deliberated on during the meeting. They will also shed light on when they plan to start cutting. Recently, however, most officials, including Jerome Powell, have asked the market to be patient about cuts.

The Fed is battling a stagflation scenario that is characterised by weak economic growth and high inflation. While inflation dropped slightly in April, it remained stubbornly above the Fed’s target of 2.0%. The economy grew by just 1.6% in the last quarter. 

Therefore, the Fed will likely opt to cut interest rates later this year in a bid to boost the economic growth. Some analysts believe that rate cuts will even slow some inflation numbers like housing and insurance.

The next important USD/TRY news will be the upcoming Turkish Central Bank interest rate decision. It is unclear what the committee will do since inflation remained stubbornly high in April when it jumped to 69.80%. 

I believe that the CBRT will decide to leave interest rates unchanged at 50% and the overnight borrowing and lending rates at 47% and 53%. However, some analysts expect that it will deliver its final cut of the year.

On the positive side, analysts believe that inflation will start cutting interest rates later this year as inflation starts falling. The other positive is that the country’s gross forex reserves have jumped for two straight weeks and now stand at over $74.20 billion.

On the other side, the spread between Turkey’s inflation and interest rates is still wide, meaning that holders of its bonds are making a negative return. Also, it is unclear whether most Turkish businesses and individuals will ever embrace the lira, which has plunged hard over the years. This is the biggest challenge that the currency faces. 

USD/TRY technical analysis

USD/TRY chart by TradingView

The daily chart shows that the USD to TRY exchange rate peaked at 32.81 in April and has now retreated to 32.20. It remains above the crucial support level at 31.75, its lowest point in March and April.

It has remained slightly above the 50-day moving average while the Average True Range (ATR) has dropped to its lowest level since January. Therefore, the pair will likely remain in this range this week even if the CBT decides to hike interest rates. 

In the longer term, there is a likelihood that the pair will drop to about 30 if the Fed decides to cut interest rates sooner. The alternative scenario is where the lira slumps and retests the key point at 32.81.