USD/TRY most overbought since 2018 as Turkish lira slumps to record low

USD/TRY most overbought since 2018 as Turkish lira slumps to record low
Written by:
Crispus Nyaga
26th October, 14:09
  • The USD/TRY rose to a record high as tensions between Turkey and western countries escalated.
  • Turkey has provoked the US and Europe to impose sanctions.
  • The Relative Strength Index (RSI) has jumped to the highest level since 2018.

The Turkish lira (USD/TRY) dropped to the lowest level on record as traders reacted to the rising tensions between Turkey and western countries. The pair is trading at 8.0876, which is the highest it has been ever.

USD/TRY

Turkish lira under pressure

The Turkish lira has been under intense pressure lately. This year, the currency has dropped by more than 35% against the US dollar, euro, and British pound. This decline makes it one of the worst-performing currencies in the world.

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Analysts attribute the weakness of the lira on several things. First, the Turkish economy has been hit relatively hard by the coronavirus pandemic. In the second and third quarters, the country entered into its first recession in more than a decade.

Second, the USD/TRY has gained because of the actions by the Turkish central bank, which has slashed rates 9 times. Today, the country has among the lowest interest rates in the world. Just last week, the central bank decided to leave interest rates unchanged at 10.25%, a surprise since analysts were expecting a 125-basis points hike.

A few hours after it did that, lenders borrowed more than $3.5 billion from the late liquidity window. In a statement after the rate decision, an analyst told Bloomberg that:

“Political pressure was likely behind the central bank’s complicated decision. President Recep Tayyip Erdogan has been vocal in demanding lower interest rates. Meanwhile, pressures on the lira indicate financial markets are seeking tighter policy.”

Third, the bank has also intervened in the forex market by banning some international banks from shorting or trading in the currency. While these measures were intended to hold the lira stable, they lowered investors’ confidence in the currency.

Today, the USD/TRY rose sharply because of statements by Recep Erdogan yesterday. In a speech, he dared the US and European governments to sanction the country. During the weekend, France recalled its ambassador to Ankara after Erdogan abused the French president. He also provoked the US to impose sanctions in relation to crashes in Nogorno and Karabakh. The country has also supplied weapons to armed forces in Azerbaijan.

USD/TRY technical outlook

USD/TRY
USD/TRY technical chart

The USD/TRY price rose sharply today. On the weekly chart, we see that the pair is trading above the short-term and longer-term moving averages. Also, the Relative Strength Index (RSI) has jumped to the highest level since August 2018. The price is also above the previous support level at 7.1480. Therefore, the path of least resistance is higher, which means that the price will continue rising.

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