USD/TRY recovers further from the lowest level since mid-November, eyeing 12.00 mark

• USD/TRY gained positive traction for the second successive day on Tuesday.
• The momentum allowed the pair to reverse a part of last week's steep slide.
• Concerns about Turkey's monetary policy continued undermining the lira.

The Turkish lira weakened for the second successive day against the US dollar and pushed the USD/TRY pair back closer to the 12.00 mark during the early part of the European session.

The momentum allowed the USD/TRY pair to move away from the lowest level since mid-November touched last week in reaction to the government's move to cover FX losses on certain deposits. President Tayyip Erdogan announced a scheme last Monday, under which the Treasury and central bank will reimburse losses incurred on converted lira deposits. This, in turn, led to a steep decline of more than 50% for the pair, though spot prices managed to find decent support ahead of the key 10.00 psychological mark.

Investors remain concerned over Turkey's monetary policy amid fears of spiralling inflation, which continued acting as a headwind for the lira and assisted the USD/TRY to attract fresh buying. The Central Bank of the Republic of Turkey (CBRT) has not been given a free hand, instead is forced to adopt President's belief that high-interest rates cause inflation. In fact, the CBRT has slashed its policy rates by 500 basis points to 14% since September despite the fact that the official inflation rate topped 21% in November.

Meanwhile, the uptick on Tuesday was sparked by the overnight comments from Turkey's Finance Minister Nureddin Nebati, saying that state banks and institutions did not sell dollars on the night that Erdogan made his announcement. That said, a softer tone surrounding the US dollar held back traders from placing aggressive bets and kept a lid on any further gains for the USD/TRY pair, at least for the time being. Nevertheless, the lira, at current levels, is still down nearly 40% YTD against the USD and seems vulnerable to depreciate further.