EUR/TRY fresh trend surges on cobblestones

After almost four months of consolidation, last week the EUR/TRY pair finally left the channel it was trapped in and resumed an upward trend. However, after reaching an all-time high on Thursday, the 18th, at around 36.30, the pair is currently undergoing a retracement, trading around 35.82 at the time of writing.

Technically, the pair should not retrace below the 35.6 level to maintain the uptrend without putting under question the breakout and the 36.30 level will now act as a resistance.

While the upcoming days will help determine whether this is a retracement within a new trend or a false breakout, it is noteworthy that this early pullback could be influenced by both the simultaneous decline of the Euro against the USD and by the alleged intervention in the forex market by Turkish authorities, who over the past week sold dollars to defend the Lira.

To better understand the market dynamics and their potential impact on the EUR/TRY pair, it is useful to consider some financial and macroeconomic factors.

While the Turkish Lira has fallen more than 10% against the Euro and the USD so far in 2024, due to Turkey's high inflation levels the Lira is actually appreciating in real terms. This real appreciation is hurting both exports and tourism, creating current account problems (Mustafa Gultepe, head of the Turkish Exporters’ Assembly, openly calls for further currency depreciation to restore competitiveness).

On the other hand, a combination of high interest rates and a relatively stable currency has made Turkey very attractive to foreign investors. They have poured billions of dollars into Turkish assets this year, according to Bank of America, taking advantage of high interest rates on bonds and the real appreciation of the Lira on real assets. At the same time, the Turkish Central Bank has capitalized on these international inflows in its efforts to rebuild national foreign currency reserves.

Today, the Turkish Central Bank will meet to decide on interest rate policy. According to a Bloomberg survey, economists unanimously forecast that the one-week repo rate will remain unchanged at 50%. Governor Fatih Karahan continues to reiterate the Central Bank's commitment to fighting inflation. Turkish policymakers are therefore expected to focus on alternative tightening measures aimed primarily at draining the Lira's oversupply in the market (a side effect of both policymakers' efforts to replenish foreign-exchange reserves and foreign capital influx).

As for the policy's reliability, Moody’s recently upgraded Turkey’s credit rating for the first time in 11 years, citing improved credibility of the central bank’s monetary policy (the rating was upgraded two notches to B1 from B3, with a positive outlook).

Preserving the real appreciation of the Lira is useful in the fight against inflation. Higher reserves and the Central Bank’s commitment to maintaining tight monetary policy will help Turkey control the currency exchange rate (as remarked by the Financial Times).

The next inflation reading by Turkstat is expected on August 5th, and it is anticipated to be a significant factor that could trigger market volatility if it diverges from the projected path.

The EUR/TRY pair is navigating this complex Turkish economic and financial landscape, where it is challenging to predict which forces will prevail over different timeframes. Given that EUR/TRY is also a crossrate influenced by the USD/TRY rate, while it is possible that Turkish authorities will allow it to slide further, major runs like those experienced in the recent past are less likely.

We will continue to monitor the pair's evolution in the upcoming days in search for new clues.