USD/TRY analysis: lira analysis as Turkish inflation rises

The USD/TRY exchange rate continued its strong rally this week, even as the US Dollar Index (DXY) continued its downtrend. The pair was trading at a record high of 41.6850, much higher than the year-to-date low of 35.

Turkish inflation is surging 

The USD/TRY exchange rate continued soaring on Friday after the Turkish statistics agency published a stronger-than-expected consumer inflation report that lowered the expectations of interest rate cuts.

The report also pushed the Turkish government bond yields downwards. Data shows that the yield of the ten-year government bonds dropped to 28.87%, its lowest level since July 7 this year. It has been in a strong downward trend after peaking at 32.80% in April this year.

According to the statistics agency, the country's inflation rose for the first time in more than a year. It rose to 33.3% in September from the previous 33%, which was much higher than the median estimate of 32.5%. It was the first time that inflation has risen in more than a year.

The headline CPI rose 3.2% on a MoM basis from the previous 2.04%. Another report showed that the headline Producer Price Index (PPI) rose from 25.16% in August to 26.59% in September and from 2.48% to 2.52% on a month-on-month basis.

The USD/TRY and Turkish bonds reacted as they did because the central bank recently warned of a potential uptick in inflation as the school term started. Most private universities have recently increased school fees to deal with the high inflation.

The CBRT will likely continue with its interest rate cuts. It restarted cutting in July, bringing the benchmark to 46%. Most recently, the bank slashed rates to 40.5%, and analysts expect that process to continue in the coming weeks.

Federal Reserve interest rate cuts

The USD/TRY exchange rate is also reacting to the happenings in the United States, where the government shutdown is now in its second day.

A report released by ADP this week showed that the economy lost over 36,000 jobs in September. These losses may escalate as Trump has confirmed that the government will likely fire thousands of federal workers as the shutdown continues.

In a statement, Karoline Leavitt confirmed that the administration would look to fire workers on agencies that don't align with the administration’s values.

The government shutdown means that the Bureau of Labor Statistics will not publish the October non-farm payrolls report today. Analysts were expecting the report to show that the unemployment rate remained at 4.3%, while the economy added 50,000 jobs.

USD/TRY technical analysis 

The daily timeframe chart shows that the USD/TRY exchange rate has persistently been in a strong uptrend for decades. This rally has been because of the central bank’s lack of independence and the interest rate cuts, even when inflation is in a strong uptrend.

As a result, the pair has consistently remained above all moving averages, while oscillators have always been pointing upwards.

Therefore, the pair will likely continue rising as investors target the important resistance level at 45 in the coming months.