USD/TRY: Is the lira a good buy as Turkish inflation softens?

The USD/TRY exchange rate retreated to its lowest point since June 20th after the encouraging Turkish inflation data. It dropped to a low of 32.57 on Tuesday, down from the year-to-date high of 33.16.

Turkish inflation is falling

The Turkish lira, one of the worst-performing currencies in the past few years, received some encouraging inflation data on Wednesday.

According to the statistics agency, the headline Consumer Price Index (CPI) retreated from 3.37% in May to 1.64% in June. This decline was bigger than the expected drop to 2.2%. 

The inflation figure dropped from 75.45% in May to 71.60% in June. This decline was also bigger than the median estimate of 72.60%. It was also the first time that the country’s inflation dropped in months.

More data showed that the core inflation, which excludes the volatile food and energy prices, dropped to 1.7% MoM and 71.4% YoY, respectively. 

Additionally, the producer price index also pulled back in June. It dropped from 57.68% in May to 50% in June. 

These numbers mean that Turkey is still facing an elevated level of inflation. However, they also signal that the country is turning around the corner, a move that President Erdogan and the Turkish Central Bank will welcome.

Turkey has been facing an elevated level of inflation as the lira crashed to a record low. In response, the central bank hiked interest rates from 8% in May last year to 50% today. 

High interest rates help to slow inflation by reducing spending and incentivising savings. The challenge has been Turkish investors have continued to generate negative returns when you factor in inflation. 

The main risk for the Turkish lira is that the central bank may decide to start cutting interest rates prematurely. Most analysts expect it to start slashing rates in the fourth quarter if the country publishes weaker inflation numbers in the next few months. 

The USD/TRY pair also reacted to the relatively weak Turkish trade numbers. The country’s exports dropped from $24 billion in May to $18.57 billion in June. 

Federal Reserve minutes ahead

The next catalyst for the USD/TRY pair will come from the United States where the Federal Reserve will publish its minutes figure. 

These minutes will provide more color on the last meeting and what members deliberated. In that meeting, the bank decided to leave interest rates unchanged between 5.25% and 5.50%. 

The accompanying statement also showed that the committee believed that one rate cut this year will be adequate. Therefore, the minutes will provide more information about what happened and what to expect later this year. More hawkish minutes will likely push the USD/TRY exchange rate higher and vice versa.

The next important data to watch will be the ADP jobs report followed by the Non-Farm Payrolls (NFP) numbers scheduled on Friday. Economists expect the data to reveal that the economy added over 150k jobs in June. 

USD/TRY technical analysis

USD/TRY chart by TradingView

The daily chart shows that the USD/TRY exchange rate formed a shooting star pattern in June. This pattern is characterised by a small body and a longer upper shadow and is one of the most bearish chart patterns in the market.

It has now dropped below the key support level at 32.80, its highest swing on April 14th. However, it remains slightly above the 50-day Exponential Moving Average (EMA), meaning that buyers are still in control.

The Relative Strength Index (RSI) has pointed downwards while the Awesome Oscillator has turned red. Therefore, the pair will likely continue dropping in the next few days, with the next point to watch being at 32.00. This view will be confirmed if it drops below the ascending trendline that connects the lowest swings since March.