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What Is Driving Turkish Lira’s Trend?

Exotic currency pairs are thinly traded instruments and, therefore, more volatile when compared to other currency pairs. One of the characteristics of exotic currency pairs is that they tend to form strong trends. At the same time, major and minor currency pairs tend to see trends change more frequently.

Exotic currency pairs have always been known to be volatile. However, the category has seen solid and long-lasting trends over the past six months. The Turkish Lira and the US Dollar is one of the main examples of an exotic pair with a robust and lasting trend. The pair has been on the rise for a whopping ten consecutive weeks. This is, of course, something that is rarely seen outside the exotic currency category.

USD/TRY price chart.
USD/TRY price chart.

Most economists and currency analysts advise that the rapid weakening of the Lira is the result of President Erdogan's intervention in the Central Bank’s Policy. Most Central Banks are independent of the government, but the fact that the Turkish Central Bank seems to be under the influence of the “debatable government'' has lowered the market’s confidence in the Lira, as a result, we are looking at decreased demand.

Erdogan has demanded that the bank lower interest rates even in the face of rapid inflation, which reached 73.5% in May. So, at the end of 2021, the rate was corrected from 19% to 14%, and, according to the country's leader, this policy is likely to be implemented again soon. The currency has been influenced both by hyperinflation and lower interest rates.

The extremely high levels of inflation, political instability, and lower interest rates have fueled the decline. The market is following Turkey’s Central Bank announcement regarding the weekly repo auction rate, which has not changed since December 2021. The prospects for monetary policy remain uncertain as the president pushes for lower rates, but inflation continues to grow higher. However, most analysts advise that a sharp increase in the interest rate should not be expected.

Furthermore, the current level of foreign reserves is also having a strong effect on the currency. This is something that is not often looked at, but the global reserves are known to have one of the biggest effects on exchanges. Due to the depreciation and volatility, many countries and banks have dumped their reserves in the Lira or, in most cases, decreased their exposure. The Turkish authorities have been negotiating with many countries in the region to exchange high levels of reserves to boost the Lira, however, they have been unsuccessful so far.

When looking at the price movement of USD/TRY, we can see that the US Dollar is currently in the driving seat. The drive movement is in the positive zone today but has not yet passed the current resistance level. The bullish price movement has halted at the resistance level over the past 2 weeks and traders are now currently waiting to see if the exchange can form a bullish breakout.

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