Erdogan and the Turkish Lira Eye Redemption from Policy Pivot

TURKISH LIRA KEY POINTS:

READ MORE: Bitcoin (BTC/USD) Posts a Six-Week High on Positive News Flow

PRESIDENT ERDOGAN SET TO ACCEPT POLICY PIVOT

Turkish President Recep Tayyip Erdogan looks set to accept a policy pivot as the new Central Bank Chief and Finance Minister kickstart their respective reigns. The Turkish Central Bank is expected to deliver a rate hike on Thursday with many analysts and a recent Reuters poll touting and unprecedented hike as high as 1150bps, which would bring the policy rate back up to the 20% mark. This would be slightly higher than the 19% policy rate in 2021 before President Erdogan began his policy ‘experiment’.

Hafize Gaye Erkan, Turkey Central Bank Chief

Source: Getty Images

President Erdogan looks set to walk back election promises around maintaining the current economic policy and low-rate environment. The first sign came with the appointment of Mehmet Simsek as Finance Minister who immediately stated that Turkey’s only economic choice is to return to “rational ground and compliance with international norms”.

Mr Simsek followed up his comments with the appointment of Turkeys first female Central Bank Chief in Hafize Erkan who is a well-known figure in Wall Street circles. The only apprehension around the appointment stems from Erkan’s recent role as Chief Executive of First Republic Bank in the US, one of the failed Banks during the recent US Banking storm.

POSSIBLE OUTCOME OF THE CENTRAL BANK MEETING

The hope for a policy pivot gathered further steam last week as Erdogan accepted that although his decision on rates has not changed, Finance Minister Simsek needs to be able to take the necessary steps to get the Economy on track. We have seen policy shifts and erratic behavior from President Erdogan in the recent past when it comes to Central Bank policy with Erkan hoping to avoid similar challenges.

Turkey Inflation Rate

Analyst views on today’s Central Bank meeting vary wildly with some touting a rate hike as high as 1150bps. Inflation still remains uncomfortably high sitting at just below the 40% mark (Chart Above) and with no real guidance to go on makes any predictions for today nigh impossible. Either way any rate hike delivered by the Central Bank is likely to arrest the Lira’s slump with forward guidance and a hawkish outlook looking like the most probable outcome. The question persists however, will President Erdogan allow the Central Bank autonomy to do its job? Time will tell.

TECHNICAL OUTLOOK AND FINAL THOUGHTS

Looking at the bigger picture, volatility is expected to remain high over the coming days especially if we receive the hawkish forward guidance I am anticipating. USD/TRY remains confined in a tight range of late between the 23.4460 and 23.7100 with today’s decision likely to facilitate a breakout. As mentioned previously analyzing USD/TRY from a technical standpoint remains a challenge with price action extremely erratic and abrupt.

A hawkish move and policy pivot today could push USD/TRY back toward the psychological 20.000 mark which currently lines up with the 50-day MA. Further supporting a downside break is the 14-day RSI which remains in extremely overbought territory, although it has been languishing at these levels since the start of April.

USD/TRY Daily Chart – June 22, 2023

Source: TradingView

Written by: Zain Vawda, Market Writer for DailyFX.com

Contact and follow Zain on Twitter: @zvawda