USD/TRY surges to fresh record high, around mid-12.00s on Erdogan's remarks

• Turkish lira nosedived after President Tayyip Erdogan defended recent sharp rate cuts.
• Hawkish Fed expectations acted as a tailwind for the USD and contributed to the rally.
• Extremely overstretched conditions capped any further gains, only for the time being.

The Turkish lira crashed nearly 10% intraday and pushed the USD/TRY pair to a fresh all-time peak, around mid-12.00s during the early European session on Tuesday.

The lira suffered its worst days after President Tayyip Erdogan defended the Turkish Central Bank's (CBRT) decision to cut the One-Week Repo Rate by 100 bps to 15.00% last week. Erdogan has held the unorthodox view that lower rates are the only way to curb inflation, boost economic growth and job creation.

Adding to this, the CBRT chief hinted at another cut next month, which could further deepen Turkey’s economic difficulties and increase the likelihood of a full balance of payment crisis. This, along with the strong bullish sentiment surrounding the US dollar, further contributed to the lira's meltdown on Tuesday.

The greenback remained well supported by growing acceptance for an eventual Fed rate hike move in 2022 to contain stubbornly high inflation. The Fed rate hike bets increased further after US President Joe Biden on Monday formally nominated Jerome Powell to serve as the chairman of the Federal Reserve for a second term.

However, extremely overstretched conditions capped any further upside for the USD/TRY pair, which, so far, has managed to hold its neck comfortably above the 12.00 mark.