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GBP/TRY spot rate at time of writing: 10.68Bank transfer rate (indicative guide): 10.01-10.08FX specialist providers (indicative guide): 10.21-10.28More information on FX specialist rates hereThe Lira tumbled to new record lows Tuesday after a diplomatic spat with France further toxified an already poisonous environment that's got a threat of economic sanctions and ire over Turkey's interest rate policy threatening to push EUR/TRY and USD/TRY to 10.0 and 8.50 respectively.

New lows for the Lira lifted USD/TRY to 8.19 and EUR/TRY to 9.67 on Tuesday, denoting increased inflationary pressures and potentially inciting further intervention in the market by authorities.

This was after a dam broke on Monday following France's decision to recall its ambassador from Turkey, and President Recep Tayip Erdogan's decision to encourage a boycott of French goods amid a war of words that was ignited in the wake of a terrorist attack in Paris little more than a week ago.

The bitter exchange is just the latest deterioration in relations between an increasingly isolated Turkey and neighbouring European countries, although especially France, which has been the leading voice speaking out against neo Ottoman activities in the East Mediterranean.

But it's not just European countries that Turkey's leadership is at loggerheads with, as a diplomatic spat with the U.S. over the country's purchase of a Russian made missile defence system is still ongoing and, some fear, could yet lead to sanctions from Washington if-not others too.

Above: USD/TRY shown at daily intervals alongside EUR/TRY (black line, left axis) and GBP/TRY (blue line, left axis).

"This year the focus has instead shifted to Turkey and Russia, which are seen as potential targets for sanctions or some form of international pressure under a Biden administration. Biden and the Democrats’ increasing odds of victory have probably played an important role in these currencies’ underperformance," says Thomas Matthews at Capital Economics. "Ultimately though, the factors weighing on the lira are likely to persist regardless of who wins in November."

Matthews says the Lira is vulnerable because Turkey's financial system is fragile and hooked on a diminishing supply of foreign currency, which has been a factor in the chronic depreciation of recent years.

But this vulnerability is all the more pertinent in 2020 because of the U.S. presidential election next Wednesday, which investors see producing a Democratic Party administration led by opposition candidate Joe Biden rather than the incumbent President Donald Trump.

It's thought that a Democrat led administration would be more willing to flex U.S. foreign policy muscles and so be more trigger happy with economic sanctions which, if imposed on Turkey, would deepen an economic crisis that predates the coronavirus pandemic.

"The market is seriously concerned that if former VP Biden wins on November 3, the US will penalise Turkey for purchasing the Russian S-400 air defence system. It is also worth recalling that the CBRT left the market deeply disappointed by keeping the 1-week repo rate unchanged last week," says Michael Every, a global strategist at Rabobank. "The CBRT may seriously consider an emergency rate hike to stem the lira’s rout, especially if on this occasion opinion polls prove to be correct and Biden wins."

Above: USD/TRY shown at monthly intervals alongside EUR/TRY (black line, left axis) and GBP/TRY (blue line, left axis).

Sanctions risk may have been behind the Lira's tumble to new lows on Monday and Tuesday but last week the currency's plight resulted from a Central Bank of the Republic of Turkey (CBRT) decision to leave its interest rate unchanged at the recently-increased level of 10.25%.

That decision defied expectations of another rate hike to follow September's lift from 8.25%, which was meant to mark the beginning of a reversion to a more orthadox rate policy and a stabilisation of the Lira.

But nothing further was forthcoming, leading investors to conclude the CBRT's September hike had met disapproval from President Erdogan who's widely thought to exert undue influence over the bank.

For as long as that undue influence continues, analysts at Commerzbank look for the Lira to remain under pressure and have warned in their latest briefing that USD/TRY could be in danger of overshooting their year-end forecast of 8.20 and at least temporarily rising to 8.50.

Meanwhile, the charts continue to point the EUR/TRY rate in the direction of the psychologically important 10.0 level.

Source: commerzbank.

"EUR/TRY’s rise from the 7.3502 late May low has so far taken it to a new all-time high at 9.5479 (according to CQG data)," says Axel Rudolph, a senior technical analyst at Commerzbank. "Immediate upside pressure should be maintained while the currency pair stays above last week’s low at 9.2024...Our medium-term bullish view will remain intact while the cross stays above the late September low at 8.7517 on a daily chart closing basis."

Turkey’s Lira has been in a spiral for more than a decade but since 2018 at least some of it has resulted from perceptions that the central bank is politically compromised, a situation that’s not been helped by the rhetoric of President Erdogan's continued argument that high interest rates lead to high inflation. He says the only way to curtail price pressures in the economy is to cut rates.

That’s precisely the opposite of how the rest of the world approaches interest rates, and goes some way toward explaining the severe selling pressures that have lifted USD/TRY from 3.77 at the beginning of 2018 to nearly 8.0 on Tuesday. EUR/TRY and GBP/TRY have risen by similar magnitudes, in each case denoting depreciation pressures that have further raised Turkish inflation and served as an additional headwind to the economy.

"The lira exchange rate had recently stabilised, not because CBT had been tightening liquidity and pushing up the average cost of funding for banks, but because for a brief moment it appeared that CBT might have shifted into a proper rate hiking cycle – that relentless lira weakness had changed the mind of policymakers for good," says Tatha Ghose, an analyst at Commerzbank in a research note last week. "We warned in our FX Daily this morning that such “automatic” assumptions were risky in the context of Turkish monetary policy. Our concern turned out to be justified. Look for significant upside on USD-TRY."