USD/TRY retreats from yearly top near 18.00 amid softer USD, CBRT’s inflation fears

• USD/TRY pares early gains as DXY renews three-week low.
• CBRT raised annual inflation forecasts to 60.4% versus 42.8% expected in April.
• “Technical recession” drowns US Treasury yields, greenback ahead of Fed’s preferred inflation gauge.

USD/TRY extends pullback from intraday high to pare daily gains around 17.93 during early Friday morning in Europe. In doing so, the Turkish lira (TRY) pair justifies the broad US dollar weakness while trying to overcome the bearish bias triggered by the Central Bank of the Republic of Türkiye’s (CBRT) Quarterly Inflation Report.

That said, the US Dollar Index (DXY) drops to the lowest level since July 05 as the Treasury yields remain pressured around a three-month low amid recession fears. The US 10-year Treasury yields fade early Asian session rebound while declining to the fresh low since April, near 2.66% at the latest.

On Thursday, the initial readings of the second quarter (Q2) 2022 US Gross Domestic Product (GDP) marked “technical recession” as the annualized figures dropped for the second consecutive time. Given the fears of the economic slowdown, the Fed hawks may have to rethink faster/heavier rate hikes, which in turn weigh on the US dollar. Earlier in the week, Fed Chair Jerome Powell teased “neutral rates” and drowned the greenback.

Elsewhere, Reuters quotes the CBRT’s quarterly inflation report while saying, “Turkey's central bank raised its annual inflation forecast to 60.4% for the year-end from 42.8% three months ago, continuing a trend of playing catch up with extreme price rises, according to a presentation by Governor Sahap Kavcioglu on Thursday.”

The economic fears and the shift in the Fed’s hawkish bias appeared to have weighed on the US dollar. Even so, fears of more inflation and the CBRT’s inability to raise rates appear to propel the pair’s prices.

Moving on, the Fed’s preferred inflation gauge, namely the Core Personal Consumption Expenditure (PCE) Price Index, expected 0.5% MoM for July versus 0.3% prior, will be important for near-term USD/TRY direction.

Technical analysis

Unless breaking the monthly support line, around 17.80 by the press time, USD/TRY buyers remain hopeful of crossing the late 2021 peak surrounding 18.37.