USD/TRY: Lira on the verge after the new Turkish inflation warning

The USD/TRY exchange rate is still sitting at its all-time high as concerns about the Turkish economy continued. The USD to Turkish lira exchange rate rose was trading at 26.95, which was slightly lower than its record high of 27.25. 

Turkey inflation to surge

The Turkish lira has been in a freefall this year as concerns about the economy continued. And the situation could worsen in the coming months. In a statement, the head of Turkey’s central bank warned that inflation could surge this year.

The bank expects that inflation will rise to 58% by the end of the year. In its previous estimate, the bank said that inflation would end the year at 22.3%. The governor cited the falling currency and the recent wage increases.

Therefore, the Central Bank of the Republic Turkey (CBRT) expects that inflation would rise from June’s low of 38.2%. A weaker Turkish lira leads to higher inflation because the country imports most of its items like oil and natural gas.

The challenge for Turkey is that the central bank is not reacting to the elevated inflation as it should. The bank decided to hike interest rates from 8% in June to 15%. It then hiked rates to 17% this month. All these rate increases were lower than what analysts were expecting.

Turkey is also facing other challenges. For one, its budget deficit has surged in the past few months. Its deficit jumped to more than 219.6 billion liras in June from the previous month’s 118.9 billion. 

Turkey has also seen its foreign reserves drop. It now holds just under $50 billion in foreign reserves and about $50 billion in gold. Therefore, there is a likelihood that the country will go through a debt crisis in the next few years.

USD/TRY forecast

USD/TRY chart by TradingView

The daily chart shows that the USD to TRY exchange rate has been in a strong bullish trend. It has jumped above all moving averages. At the same time, the Relative Strength Index (RSI) has moved to the overbought level. 

Therefore, I believe that the Turkish lira will continue soaring in the coming months. If this happens, the next level to watch will be at 30. The only caveat of this is if the CBRT intervenes and delivers bigger rate hikes.