FX.co ★ Global macro overview for 08/06/2018

The Central Bank of the Republic of Turkey (TCMB) raised the main interest rate by as much as 125 basis points, from 16.50%. up to 17.75% This is the first decision of TCMB after the reform of the interest rate system announced in May. Prior to yesterday's TCMB management meeting, analysts were divided. 9 out of 17 analysts surveyed did not expect interest rate hikes. The rest counted on a rise of 50-100 basis points.

In addition, TCMB has threatened that it is "ready to further tighten" its monetary policy if necessary. In the language of central bankers, this means readiness to make further interest rate increases. In this way, Turkey defends itself against the currency crisis and the outflow of foreign capital. Since the beginning of the year, investors have lost confidence in Turkey, where under the rule of Erdogan, the central bank lost its independence in conducting monetary policy. TCMB delayed interest rate hikes, despite the fact that inflation stopped on the leash and exceeded 10% on a yearly basis. Only the threat of currency meltdown forced the Turkish authorities to react decisively. On May 23, at an extraordinary meeting, the Turkish central bank decided to "emergency" interest rate increase by as much as 300 bp. This, however, did not help and the lyre continued to weaken. It was only after the reassuring statements of President Erdogan and the "unveiling" of interest rates by TCMB that the Turkish currency began to stabilize.

The Turkish economy is struggling with fluctuating inflation - in May the prices of consumer goods grew at a rate of 12.15%. annually. The country also has problems with an excessive foreign debt of the private sector and a rapidly growing current account deficit. The cure for these ills is usually a tightening of monetary policy. It's just that the Turkish authorities have been delaying the administration of this drug for so long that they eventually had to use a horse-shaped dose. Raising loan costs from 12.75% up to 17.75% in just over a month, it can drive the country into a recession and in the result, the Turkish Lira will depreciate even more across the board.

Let's now take a look at the USD/TRY technical picture at the H4 time frame after the interest rate had been hiked. The market reacted violently by dropping to the level of 4.44 before any corrective bounce has happened. The price is still trading below the mid-term trend line resistance and if the bulls will not manage to break through this trend line, the continuation of sell-off is imminent. If the level of 4.44 is broken, then the next technical support is seen at the level of 4.37. The momentum indicator is still hovering around its fifty level, so currency there is not much pressure on the market to go up or down, but it might change very quickly.