Over the past six months, the Turkish lira (TRY) has displayed a consistent downward trajectory against the United States dollar (USD), with the decline becoming notably more pronounced in the last month. This recent depreciation followed a surprisingly large interest rate hike by the Turkish central bank, a move supported by President Recep Tayyip Erdoğan.

While the unexpected rate hike initially sparked a brief resurgence in the lira's value, the Turkish currency has since continued to weaken against the dollar. Over the past 30 days, the USD/TRY pair has climbed by 3.18%, adding to the 42.89% increase observed over the past six months.

Official data released on Tuesday revealed that Turkey's annual inflation rate remained stable at approximately 60 percent last month, marking the initial signs of success for President Recep Tayyip Erdogan's shift in economic policy.

According to the TUIK state statistics agency, consumer prices increased by 61.5 percent over the 12-month period ending in September. In August, the annual rate was 58.9 percent, while in July, it stood at 47.8 percent. Moreover, the month-on-month price increase slowed to 4.8 percent in September, down from 9.1 percent in August and 9.5 percent in July.

The surge in inflation was primarily driven by a sharp 30.3 percent monthly rise in education costs with the start of the new school year. In contrast, items like clothing saw a much more modest increase of 2.6 percent in the same month.

These figures indicate that Turkey's inflation rate may be reaching a peak following a series of interest rate hikes, which raised the policy rate from 8.5 percent to 30 percent in just four months. Erdogan, who had long supported the unorthodox economic theory that high interest rates exacerbate inflation, reversed his stance after a challenging May election that coincided with a severe economic crisis during his two-decade rule.

Subsequently, he delegated control of Turkey's economy to a group of technocrats with Wall Street experience and strong backing from foreign investors. Finance Minister Mehmet Simsek played a crucial role in convincing Erdogan that a radical change in direction was necessary to avert a systemic crisis in Turkey.

Last October, the annual inflation rate reached a staggering 85 percent, the highest level since Turkey's transition to a full-fledged market economy in the 1990s. However, as the "base effect" came into play, where high inflation rates began to appear smaller when compared to even higher rates from the previous year, the annual rate declined to a low of 38.2 percent in June.

Turkey's inflation woes look set to continue, and this escalation is compounded by the worsening economic prospects, further exacerbated by the surge in oil prices.

Global stock markets are facing pressure due to central banks, notably the Federal Reserve, asserting that they will keep interest rates elevated for an extended period. This has led to US Treasury yields reaching their highest levels in several years. Additionally, discouraging economic data from China is contributing to a risk-averse atmosphere, bolstering the strength of the US dollar.

In the United Kingdom, the market is factoring in the likelihood of one more interest rate hike as the Bank of England grapples with exceptional challenges, including persistently high inflation, a tight labor market, and the drag of high interest rates on demand. Rising oil prices and a weakening pound, which make imports more costly, are exacerbating inflationary pressures, heightening the risk of economic stagflation.

The US economy remains on a robust growth trajectory, driving the momentum of the US dollar. There is a genuine possibility of another interest rate hike in the coming months. However, there is also a looming risk of a government shutdown if Congress fails to reach a funding agreement in the next week.

In Europe, mounting concerns about a recession are exerting downward pressure on the euro and increasing the likelihood that interest rates have reached their peak following the recent increase. Markets are pricing in unchanged monetary policy until late 2024, at which point an initial rate cut is anticipated.

Across currency exchanges, the strength of the US dollar remains a significant driver of sentiment. GBP/USD has dipped to new 6-month lows around the 1.2200 level, while GBP/EUR has fallen to a 2-month low of 1.1500, where some initial demand is emerging.

According to the Office for National Statistics' latest report released on Friday, the UK economy exhibited stronger growth in the first quarter than initially projected. GDP expanded by 0.3% during the period from January to March, surpassing the previously estimated 0.1% growth. This upward revision brings the current GDP estimate to 1.8% higher than the levels observed before the onset of the pandemic in 2019.

Grant Fitzner, the chief economist at ONS, remarked, "The most recent data indicates that the GDP growth rate remains largely consistent with the data from the past 18 months. Our revised estimates suggest enhanced performance in the professional and scientific sectors, attributable to improved data sources. On the other hand, healthcare witnessed slower growth due to new real-time data revealing increased service delivery costs."

Furthermore, the GDP growth projection for the entire year of 2022 has been adjusted upward to 4.3% from the initial estimate of 4.1%. Meanwhile, the second-quarter growth rate remains unchanged at 0.2%.

Ruth Gregory, deputy chief UK economist at Capital Economics, offered her perspective, stating, "In summary, today's release has minimal impact on the overall economic landscape. The data indicates that the economy is only 0.6% above its level from a year ago. This underscores the fact that, compared to other G7 nations, excluding Germany and France, the UK has struggled in its economic recovery since the onset of the pandemic. All of this occurs in the context of impending challenges related to rising interest rates."

The Bank of England opted to maintain its interest rates at 5.25% during this week's meeting. They emphasized that the possibility of further tightening remains under consideration, and these rates are expected to persist at elevated levels for an extended period. The decision to hold rates was narrowly favoured by a 5-4 vote, and most experts now anticipate that rates will remain at this level well into the following year.

The committee observed growing indications that the aggressive series of rate increases has started to impact both the job market and the economic growth prospects. Moreover, a significant portion of the rate hikes from the past year has yet to fully affect borrowers.

In the United Kingdom, inflation unexpectedly dropped to its lowest point in 18 months, with the headline rate decreasing to 6.7%. Nevertheless, this level remains uncomfortably high and considerably exceeds the 2% target.

Meanwhile, the United States' central bank also opted to keep its policy unchanged. Although the possibility of another rate hike later in the year is still on the table, most forecasters believe that rates have already reached their peak. The decision to maintain the current policy was unanimous, and the Federal Reserve indicated that rates are likely to remain elevated well into the following year.

In Europe, it appears that the central bank has probably reached the peak of its rate increases, following the hike that occurred last week. The current monetary policy is expected to remain unchanged until late 2024, at which point an initial rate cut is anticipated.

Regarding currency exchange markets, the strength of the US dollar continues to drive market dynamics. GBP/USD is now trading at new 6-month lows below 1.2300, while GBP/EUR has fallen to the lower end of the well-established range of 1.1500 to 1.1750.