USD/TRY retreats from record highs, downside potential seems limited

• USD/TRY witnessed a modest pullback from fresh record highs touched earlier this Monday.
• Extremely overbought conditions seemed to be the only factor that prompted profit-taking.
• The near-term fundamental backdrop remains tilted firmly in favour favours bullish traders.

The USD/TRY pair witnessed a modest pullback from a record high level of 9.8505 touched earlier this Monday and has now filled the weekly bullish gap opening.

The Turkish lira plunged in reaction to developments over the weekend, wherein President Tayyip Erdogan told his foreign ministry to expel the ambassadors of 10 Western countries. This comes after the Turkish central bank (CBRT) last week decided to cut interest rates from 19% to 16%, which was seen as another factor that acted as a headwind for the domestic currency.

On the other hand, the recent strong rally in the US Treasury bond yields continued lending some support to the US dollar. This, in turn, provided an additional lift to the USD/TRY pair, though extremely overbought conditions kept a lid on any further gains, rather prompted some profit-taking at higher levels. That said, the bias remains tilted in favour of bullish traders.

Investors expect that the country’s business conditions could worsen if it gets into another conflict with the west. Adding to this, CBRT believes that high interest rates lead to high inflation and has adopted an unorthodox monetary policy. Conversely, growing market acceptance for an early policy tightening by the Fed supports prospects for the emergence of some dip-buying.

Hence, it will be prudent to wait for a strong follow-through selling before confirming that the recent bullish trajectory has run out of steam and that the USD/TRY pair has topped out.