EUR/TRY retreats after hitting new highs

Following the strong upward momentum that began at the start of August, the EUR/TRY pair reached a new all-time high on August 28,  briefly surpassing the 38 level and hitting 38.56 (data from FXCM brokerage platform). However, this progression was short-lived, as the pair began retracing in the following days and is now trading around 37.60, marking a 2.5% decline. The 38 threshold proved to be a significant psychological barrier, acting as a pivot level. If the retracement continues, the next support levels can be found around 36.84 and 36.30, corresponding to the highs of August 5th and July 18th, respectively

This recent development reflects several factors, starting with the easing momentum of the EUR/USD exchange rate, after  the stream of U.S. macroeconomic data releases in august and the debate on FED rate cuts induced a strong USD weakness.

Next, the effort by the Turkish Central Bank to prevent a sharp depreciation of the Lira. As emphasized in my previous articles, the Turkish Central Bank's hawkish stance on inflation and its commitment to closely monitoring the Lira's exchange rate are crucial factors in predicting the future trajectory of the EUR/TRY pair. Although the Central Bank has repeatedly stated that it does not hold a specific target for the Turkish currency, maintaining a positive real interest rate profile on the Lira remains essential in its fight against inflation.

In line with this approach, during August the Turkish Central Bank implemented measures to curb the rising demand for foreign currency, introducing new policies to boost Lira deposits and tighten liquidity. According to Bloomberg, all through the past month the central bank intervened directly in the forex market by selling foreign currencies to meet the increased demand.

Finally, it is worth mentioning that Turkstat this morning released the latest reading on inflation, showing that Turkey's annual inflation rate slowed further in August, dropping to 52.2% from 61.78% in July. However, household expectations for annual inflation over the next 12 months increased by 1.1% to 73.1%. This last metric is closely monitored by the Turkish Central Bank as it informs their decisions on possible rate cuts timing.