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  • USD/TRY extends the drop to the sub-5.6000 region.
  • USD-weakness favours the upbeat tone in EM FX.
  • TRY stays bid, as US sanctions are unlikely.

The Turkish Lira extends the optimism for another session on Thursday and is now dragging USD/TRY to fresh multi-month lows in the 5.60 neighbourhood.

USD/TRY approaches the 200-day SMA at 5.5850

Spot is down for the third consecutive week so far today, reflecting the change of heart around the Turkish currency since 2019 lows in the 6.25 area recorded in mid May and already gaining more than 10% since then.

TRY has been also gathering traction on the back of shrinking chances of US sanctions against the country after the purchase of the Russian S-400 defence system, all following the constructive tone from the Trump-Erdogan meeting at the G-20 event in Japan last week.

In addition, lower-than-expected inflation figures during June appear to have lifted spirits around the economy and could favour – in the longer run – an attempt by the central bank to lower rates.

What to look for around TRY

Recently, the CBRT left no doubts it will continue to support the current tight monetary conditions. However, the enduring disinflation process looks unabated, as reflected in the performance of consumer prices during June and this could open the door to a potential shift from the central bank to a looser monetary stance, including the palpable chance of rate cuts despite this move on rates appears somewhat untimely in the near term. On the positive view, TRY could gain some support along with the rest of the EM FX space in response to the recent shift of the Federal Reserve to a more dovish view on it monetary conditions as well as the better tone in the US-China trade dispute following last week’s truce. Still, the country needs to implement the much-needed structural reforms (announced in April) to bring in more stability and start a serious recovery in both economic activity and credibility.

USD/TRY key levels

At the moment the pair is losing 0.35% at 5.5997 and faces the next down barrier at 5.5928 (monthly low Jul.4) seconded by 5.5849 (200-day SMA) and then 5.3918 (78.6% Fibo retracement of the 2019 rally). On the other hand, a surpass of 5.7025 (50% Fibo retracement of the 2019 rally) would expose 5.7720 (21-day SMA) and finally 5.8986 (55-day SMA).