Lira outlook as Turkey heads to hyperinflation

The spectacular crash of the Turkish lira continued on Friday after the relatively strong consumer inflation data. The USD/TRY pair jumped to 16.50, which is about 25% from where it started the year at. The price is also about 10% below its all-time high.

Turkey inflation data

Consumer prices in Turkey continued surging in May as the cost of energy accelerated. According to the statistics agency, the headline CPI rose by 2.98% in May after rising by 7.25% in the previous month. This increase was relatively lower than the median estimate of 4.80%. 

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As a result, the headline CPi jumped by a record high of 73.50% after rising by 69.97% in the previous month. And independent analysts expect that real inflation is significantly above the official figures. 

Additional data revealed that the producer price index (PPI) also continued rising in May. The PPI rose from 7.67% in April to 8.76% in May. On a year-on-year basis, the PPI jumped to a record high of 132%. This is a sign that many Turkish companies are currently struggling. 

In addition to the rising energy prices, the inflation has surged because of the weakening Turkihs lira. As mentioned, the currency has already crashed by more than 25% this year.

A weak Turkish lira means that the country is paying more money to import vital products like oil and natural gas. This is notable since Turkey is a net importer.

Will the USD/TRY uptrend continue?

Unfortunately, it is difficult to see what will save the Turkish lira. First, the country will go to a parliamentary election later this month and a presidential election in 2023. This means that public spending is expected to keep rising.

Most importantly, the divergent paths between the Fed and the CBRT will push the USD/TRY much higher. While the Fed has embraced an extremely hawkish tone, the CBRT has been more relaxed.

The Fed has already hiked interest rates by 0.75% this year and analysts expect 150 basis point hikes in the next three meetings. The bank has also started quantitative tightening program. 

On the other hand, the CBRT has maintained low-interest rates this year after it cut them several times in 2021.

The four-hour chart shows that the USD/TRY pair has been rising and is now at the upper side of the ascending channel. The uptrend will likely keep rising as bulls target the all-time high of 18.45.


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