USD/TRY surged to a record high: will it make it a comeback?

The USD/TRY exchange rate has had another difficult year as actions of Turkey’s central bank failed to reboot the currency. The pair has jumped to a record high of 34.88, up by almost 20% this year. This performance has made the Turkish lira one of the worst-performing currencies this year.

US dollar index strength

One reason for the ongoing USD/TRY surge has been the US dollar, which has been in a strong rally in the past few months. The US dollar index has jumped to $107, up by about 7% from the lowest level in October. 

This rally has continued after Donald Trump won the US election in November. He has pledged to implement some policies that are seen as being highly inflationary.

For example, Trump has pledged to deport millions of illegal migrants, a move that will lead to labor shortages in key industries like construction and agriculture and lead to high inflation. 

He has also promised to implement large tariffs on imports. Historically, tariffs have led to higher inflation in the country since sellers increase their prices.

The next key catalyst for the USD/TRY pair will be the upcoming Federal Reserve interest rate decision scheduled on Wednesday. This will be a crucial decision because it will set the tone for what to expect in 2025.

Economists expect the Fed to cut interest rates by 0.25% because of the deteriorating labor market. Precisely, the bank is concerned that the unemployment rate has remained stubbornly high.

Turkish Central Bank ahead

The other crucial catalyst for the USD/TRY will be the next Central Bank decision, which will happen on December 26. 

This will also be an important decision because it will set the tone for what the bank will do next year.

There are signs that the CBRT will delay its rate cuts plan because inflation is not falling as expected.

Recent data shows that the headline Consumer Price Index (CPI) retreated from 48.58% in October to 47% in November. The CPI figure was higher than the median estimate of 46.60.

October and September figures were also higher than expectations. This means that the CPI will end the year above 40%, higher than what the CBRT was expecting.

Ideally, the CBT  should maintain higher interest rates for longer because Turkey’s inflation remains stubbornly high. The challenge, however, is that Turkey does not have an independent central bank and President Erdogan does not love high rates. 

On the positive side, some analysts believe that the Turkish lira is a good carry trade because of the ongoing 50% interest rates. With US rates being below 5%, some money managers have decided to borrow US dollars and invest in the Turkish lira, especially now that the latter has been stable. 

Some of the most popular companies that have bought the Turkish lira are from T. Rowe Price and Pinebridge. In a recent note, an analyst at T.Rowe Price said:

USD/TRY technical analysis

USD/TRY chart by TradingView

The weekly chart shows that the USD/TRY exchange rate has been in a steady uptrend in the past few months. It has remained above the 50-week moving average, while the Relative Strength Index (RSI) has moved above the overbought level.

The pair has also formed a rising wedge pattern, a popular bearish reversal sign. Therefore, there are rising odds that the pair will have a strong bearish breakout in the coming months, with the next point to watch being at 32.5.