Why is the Turkish lira crawling?

The beginning of the month was quite eventful for the Turkish lira. However, this week it started to lose its volatility.

What is happening?

The Turkish lira started to gain its momentum during the first week of November. It was supported by the higher-than-expected level of manufacturing PMI at 44.3 in October, but mostly by the political factor. In October, Turkey finally released from prison a US Pastor Andrew Brunson, who has been held for fake accusations of terrorism and espionage. In addition, Turkey removed the counter-sanctions on two US ministers.  In addition, Turkey was added by the White House into the list of the 8 countries, who would continue buying Iranian oil despite sanctions. As a result, USD/TRY fell significantly.

However, the overall economic conditions of the country are still unstable. The level of consumer inflation released on November 5 hit 25.24% - the highest level in 15 years. In addition, the hawkish statement by the Federal Reserve last week made the US dollar strong.  That fact weakened USD/TRY.

That is why the government started to implement measures to reduce the depreciation of the Turkish lira and to take control of the price behavior. The Treasury and Finance Ministry reduced the current account deficit amid the expectations for positive data by the end of 2018. These expectations include the country’s inflation rate target at 23.5% this year, 15.9% in 2019, 9.8% in 2020. Other measures included a 10% cut on prices, a decrease of interest rates on loans by 10% and tax cuts on furniture and vehicles.  

For now, USD/TRY is trading within the downward moving channel formed within the August maximum and September’s minimum. The pair has been stuck between the strong support at 5.2860 and the upper border of the downward channel since the beginning of the week.

If the Turkish lira is supported by the positive news, USD/TRY can fall below 5.2860. In that case, the next support lies at 5.1280.  

On the other side, if the strong US dollar breaks the upper border of the channel and pulls the price above the resistance at 5.52, the bullish pressure for the pair increases. In that case, watch the next resistance at 5.8540.

Author: FBS Analyst Team

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