Forex chart of the week: Turkish lira (USD/TRY) rebound could be epic
The USD/TRY exchange rate will be in the spotlight this week as the Central Bank of the Republic of Turkey (CBRT) delivers its interest rate decision. The pair will also react to the upcoming US GDP and Personal Consumption Expenditure (PCE) report. It has retreated to 33, down from the all-time high of 33.17.
USD/TRY is the forex chart of this week
The USD/TRY pair has been in a strong uptrend in the past decades because of the actions of President Erdogan. Erdogan has, over the years, embraced removed the Central Bank of Turkey’s (CBRT) independence, which has led to a lack of confidence of the Turkish lira.
The pair is our chart of the week because it is forming some unique patterns that could lead to a Turkish lira comeback.
On the daily chart, we see that the pair has remained above the 50-day and 100-day Exponential Moving Averages (EMA). This price action is a sign that bulls are still in contror for now.
However, the chart also shows that the bullish trend that we saw between August last year and March 2024 has started fading. The pair has remained between the support at 32 and the resistance point at 33.17 for most of the year.
There are some signs that the USD/TRY exchange rate will retreat in the coming months. On the daily chart, we see that the pair has formed a small double-top chart pattern at 33.17, a popular bearish sign.
At the same time, the pair has formed a rising wedge chart pattern that I have shown in green. This pattern is formed when an asset forms two ascending and converging trendlines.
In most cases, this pattern leads to a bearish breakout when the two lines have neared their convergence as they have done. Therefore, from a technical perspective, there is a likelihood that the USDTRY pair will have a bearish breakout in the coming weeks. If this happens, it could drop to the key support at 32.0.
Federal Reserve potential rate cuts
The main potential catalyst for the USD/TRY pair will be the actions of the Federal Reserve. Most analysts believe that the Fed will start cutting interest rates as soon as in its September meeting.
In a statement last week, Jerome Powell noted that the Fed was comfortable with the ongoing inflation trends. The most recent data showed that the headline and core inflation dropped for three straight months.
The falling inflation has also coincided with a rise of the unemployment rate. Data by the Bureau of Labor Statistics (BLS) showed that the unemployment rate rose to 4.1% in June, its highest point since 2021.
In recent statements, the Fed has signalled that it is more concerned with the labor market. As such, Powell and other officials have pointed to a potential rate cut. Later this week, the US will publish the latest Personal Consumption Expenditure (PCE) data. In a note, analysts at Bloomberg said:
“The monthly pace of core PCE inflation, the Fed’s preferred price gauge, will likely be consistent with the 2% target for a third consecutive print. With the labor market cooling, personal income growth slowing, and consumers becoming more discerning in their spending habits, we think the stage is set for a September rate cut.”
CBRT interest rate decision
The other important driver for the USD/TRY this week will be this week’s interest rate decision by the Central Bank of the Republic of Turkey (CBRT).
This will be an important meeting because of the recent Turkish inflation data. In a report earlier this month, the country’s statistics agency said that the country’s inflation dropped in June, the first monthly drop since July last year.
The headline Consumer Price Index (CPI) dropped from 74.45% in May to 71.60% in June. This decline was worse than the median estimate of 72.60%. Economists expect that the annual inflation will continue dropping for the remainder of the year.
If this forecast is correct, the CBRT will likely start cutting interest rates in the fourth quarter. I believe that such cuts will be an overreaction since inflation remains at unsustainable levels.
The CBRT has been highly disciplined since May last year when it started hiking interest rates. Just last week, Moody’s upgraded the country’s economy for returning to orthodox monetary policy. The agency said:
“The key driver of the upgrade to B1 is improvements in governance, more specifically the decisive and increasingly well-established return to orthodox monetary policy. This is yielding first visible results in terms of reducing Turkiye’s major macroeconomic imbalances.”
Therefore, the USD/TRY exchange rate will likely have a bearish breakout because of the dovish Federal Reserve. If this happens, many investors will likely place speculative bets on the Turkish lira and other emerging market currencies.
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