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GBP/TRY Recovery Stalls at a Key Resistance. Good Buy?

ISTANBUL, TURKEY - May 23, 2016: Turkish President Recep Tayyip Erdogan during World Humanitarian summit in Istanbul

The GBP/TRY price is hovering near its all-time high as the Turkish lira crash accelerated. The pair is trading at 20.72, which is slightly above the all-time high of 24.12. It has surged by over 52% from its lowest level this year and by more than 346% in the past five years. The same trend has happened in the EUR/TRY and USD/TRY pairs.

BOE and CBRT divergence

The GBP to TRY exchange rate has been in a strong bullish trend as investors focus on the divergence between the Bank of England (BOE) and the Central Bank of the Republic of Turkey (CBRT). The BOE has been relatively hawkish this year as it continues fighting inflation. It has made five rate hikes and analysts expect that it will continue this trend later this year.

On the other hand, the CBRT has done nothing to fight inflation. Last year, the bank slashed interest rates from 20% to 14% at a time when inflation was surging. The result is a situation where Turkey is now going through a period of hyperinflation. Data published this week showed that the headline inflation surged to over 78%. Analysts believe that the situation is much worse.

The previous strategies by the government to protect the lira have not worked. For example, the government offered to compensate the Turkish people based on inflation. For example, if you have 10,000 TRY in a bank account for a year and inflation rises by 80%, the government will pay you 80%. That move was called an indirect rate hike. And this year, the bank banned companies with foreign currency from getting loans.

GBP/TRY forecast

In my last GBPTRY forecast, I said that the pair was ripe for a bullish breakout. That prediction was accurate.

The four-hour chart shows that the GBP/TRY pair has been in a bullish trend recently. It is trading close to the upper side of the ascending channel. It has moved slightly above the 25-day and 50-day moving averages. At the same time, the Relative Strength Index (RSI) has moved close to the overbought level.

Therefore, with the two moving averages making a crossover, there is a likelihood that the pair will keep surging as investors target the next key resistance at 21.50. A drop below the two moving averages level will invalidate the bullish view.