USD/TRY: Turkish lira collapse still underway

on Jan 4, 2023
  • The USD/TRY exchange rate has continued consolidating.
  • Turkish inflation dived hard in December as energy prices fell.
  • Key catalysts will be liraization, CBRT actions, and Turkish elections.

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The USD/TRY exchange rate continued its consolidation phase despite positive Turkish inflation data. It was trading at 18.75, where it has been in the past few months. This price is a few pips below its all-time high of 19.32.

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Turkey inflation cools, liraization underway

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There are several factors driving the USD/TRY exchange rate. First, as I wrote here, one of the biggest forex news of 2022 was the decisions by the Central Bank of the Republic of Turkey (CBRT). The central bank decided to deliver two giant rate cuts even as inflation soared to a record high. Turkey’s inflation peaked at almost 90%.

Second, the USD to TRY exchange rate reacted mildly to positive inflation data from Turkey. According to the statistics agency, the headline consumer price index crashed from 84% in November to 64.27% in December. That decline was bigger than the median expectation of 66.53%. The producer price index dropped from over 130% to 97.72% in the same period. Still, inflation remains above that of peer countries.

Third, the other key driver for the Turkish lira is the ongoing liraization strategy by the government and central bank. The two entities are working to ensure that the lira is the currency of use in the country. Some of the top priorities are lifting the amount of lira deposits in the banking sector. It has also unveiled measures to discourage the use of foreign currency. 

The most important catalyst for the USD/TRY exchange rate will be the upcoming Turkish election. Most analysts believe that the CBRT will either maintain low rates or even cut to boost Erdogan’s chances. In most cases, currencies tend to depreciate in an election year. 

The pair will also react to more Turkish currency swap agreements and monetary policy decisions of the Federal Reserve. Analysts believe that the Fed will hike rates by about 75 basis points this year. 

USD/TRY forecast

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USD/TRY chart by TradingView

The daily chart shows that the USD/TRY exchange rate has been moving sideways in the past few days. It has remained below the important resistance level at 19. The pair has also moved slightly above the 25-day and 50-day moving averages. Bollinger Bands have narrowed while the Average true Range (ATR) has moved sideways.

At this point, the outlook of the pair is neutral with a bullish bias. If this happens, the key level to watch will be at 20. We can’t rule out a situation where the pair dives in the coming months as investors wait for the Turkish election.


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