• USD/TRY extends the rebound from the 5.60 region.
• Investors continue to look to potential US sanctions.
• The CBRT likely to cut rates later in the week.

The Turkish Lira is shedding further ground at the beginning of the week, allowing USD/TRY to clinch tops just below the 5.70 handle, where sits the 200-hour SMA.

USD/TRY focused on S-400, CBRT

Spot moves higher on Monday following increasing nervousness on the possibility of US sanctions against Ankara after the purchase of the Russian missile defence system S-400.

In this regard, it is worth recalling that the US unilaterally decided last week to remove Turkey from the F-35 programme, sparking new frictions between the two countries. Earlier today, Turkey Foreign Minister M.Cavusoglu said the country will retaliate in case of US sanctions.

Moving forward, TRY and specifically M.Uysal will be put to the test later in the week at his first meeting as CBRT Governor amidst rising odds for a rate cut. Consensus among investors, however, ranges from a 100 bps rate cut to a larger 600 bps cut.

What to look for around TRY

Despite Governor M.Uysal has already emphasized the independence of the central bank and its commitment to price stability, unease around investors – and the Lira - is likely to gather steam pari passu with the perception that a new easing cycle could be in the offing despite how untimely that decision might be in the near term at least. This likely scenario is supported by the view that President Erdogan (desperately) wants to reactivate the stagnant economy via higher credit from domestic lenders. To do that, he needs lower interest rates, which can spark fresh inflationary pressures, social unrest and most likely another crisis in the currency.

USD/TRY key levels

At the moment the pair is advancing 0.39% at 5.6768 and a surpass of 5.7587 (100-day SMA) would expose 5.7849 (high Jul.8) and finally 5.8458 (55-day SMA). On the other hand, the next down barrier emerges at 5.5971 (low Jul.19) followed by 5.5741 (monthly low Jul.4) and then 5.5627 (200-day SMA).