The Turkish lira jumped against the US dollar as traders reacted to the diverging paths between the Federal Reserve and the Turkish Central Bank (CBRT) decisions. The USD/TRY dropped to 7.3267, which was the lowest level since March 3.
Fed and CBRT decisions
The Turkish central bank concluded its third monetary policy meeting of the month on Thursday this week. In its statement, the bank surprised the market by raising interest rates faster than expected.
It raised the one-week repo rate from 17.0% to 19.0%. This increase was higher than the median estimate of 18.0%. This was the third time the bank has hiked rates during the current governor’s tenure. It also raised the overnight borrowing rate from 15.50% to 17.50% and the lending rate from 18.50% to 20.50%. Analysts were expecting a modest rate increase.
The three rate hikes made under Naci Iqbal have helped to boost the lira. The USD/TRY has dropped by 14% during his tenure. Similarly, the GBP/TRY and EUR/TRY have dropped by 9% and by 13.4%, respectively.
Recent economic numbers have been supportive of Turkish rate hikes. Early this month, the country’s statistics agency said that consumer prices increased by 0.9% in February after rising by 1.68% in the previous month. This increase pushed the annual CPI to 15.61%, up from the previous 14.97%. Economists were expecting the CPI to rise by 15.39%.
In the same period, the producer price index (PPI) increased from 26.16% to 27.09%. This performance was mostly because of the overall higher energy prices. As a net oil importer, Turkey suffers when the oil prices climb up. In the past year, oil prices have moved from less than $15 per barrel to more than $70. This has led the country’s manufacturers to boost prices.
Meanwhile, business activity has rebounded, with the Turkish retail sales rising from 1.6% to 2.0%. Industrial production rose from 1.6% in December to 2.0% in February, while manufacturing production rose to 51.7.
The USD/TRY price declined because of the divergence between the Fed and CBRT decisions. While the CBRT’s decision was relatively hawkish, the Fed made a dovish decision on Wednesday.
The bank did not tweak its monetary policy. It left interest rates and asset purchases unchanged. It also upgraded the economic outlook for the country from 4.2% to 6.5%, citing the recent stimulus and the ongoing vaccination drive. It also expects inflation to remain above 2.2% and the unemployment rate to fall.
However, despite the rosy outlook and the rising bond yields, the bank insisted that the current regime of easy money is warranted. As such, it expects to hike rates again in 2024.
In contrast, the smaller Norges Bank predicted that it would hike rates in the next half of the year while the Brazilian central bank hiked rates.
USD/TRY technical outlook
The USD/TRY declined sharply on Thursday after the CBRT and Fed decisions. It declined to the lowest level since March 3. Also, it moved slightly below the 50% Fibonacci retracement level, while the two lines of the Stochastic oscillator have moved below the oversold zone.
Notably, the pair managed to move below the important support at 7.4315, which was the lowest level on March 11. Therefore, the pair may keep falling as bears target the 61.8% Fibonacci retracement level at 7.2370.