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Turkish lira rebounds after recent collapse, but economic concerns signal more downside to come


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Turkish lira rebounds after recent collapse, but economic concerns signal more downside to come

Turkish Lira pulls back after sharp spike into record highs, but inflation concerns bring expectations of further upside to come.

BG_Turkish_lira_23098.jpgSource: Bloomberg
 Joshua Mahony | Senior Market Analyst, London | Publication date: Wednesday 24 November 2021 

Turkish lira tumbles to record low as Erdogan backs lower rates

USD/TRY has seen huge volatility over the course of the week, with the pair rising into a fresh record high thanks to the continued influence of President Erdogan.

The country’s leader has been struggling to get the economy on track as rocketing inflation hurts his popularity. However, Erdogan has long failed to put the lira on a more stable footing, with central intervention in monetary policy concerns often seeing questionable decisions over the years.

The Reuters image below highlights the raft of questionable decisions taken to the detriment of the lira.

 

 

 

Lira_decline.pngSource: Reuters

 

This week saw Erdogan state that he plans to stand by the policy of lowering rates with a view to stimulating economic growth.

Unfortunately such moves also devalue the lira, thus importing inflation. With Turkish inflation currently around 20%, the economic outlook is significantly constrained by the depreciating value of income in the country.

Below we can see how the USD/TRY pair has moved upward as inflation similarly increases over time. With the lira falling and global prices on the rise, there is likely to be further upside for prices and the USD/TRY.

Lira_vs_inflation.PNG.png

 

Today has seen a sharp reversal of yesterday’s gains, in part reflecting the feeling that things have become over-extended for the time being.

However, it is worthwhile noting the very consistent long-term uptrend for this pair. With that in mind, this current retracement looks like a buying opportunity, with a break back below the 10.9581 support level required to negate that view.

USDTRY-4-hours-2021_11_24-12h08.pngSource: ProRealTime
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