The Indian Rupee (INR) showed recovery on Tuesday, bolstered by a decline in the US Dollar (USD) and improved risk sentiment, which favored emerging market currencies like the INR. Despite this uptick, the local currency’s upward momentum might be constrained by fluctuating risk sentiment affecting market dynamics.
On Monday, the INR had plummeted to a historic low at the market open, driven by traders’ fears of a potential US recession, which could trigger further foreign outflows from India and other emerging markets. Additionally, the unwinding trade, spurred by a rally in the Chinese Yuan and Japanese Yen, could pose challenges for the Indian Rupee.
However, expectations of deeper rate cuts by the Federal Reserve (Fed) could apply selling pressure on the Greenback, potentially lowering the USD/INR pair. Market analysts anticipate the US central bank will reduce interest rates by 50 basis points (bps) in both September and November, with an additional quarter-point cut in December. Traders are closely watching the Reserve Bank of India’s (RBI) interest rate decision on Thursday, with the RBI expected to maintain the repo rate at 6.5% amid concerns over rising food inflation.
Market Highlights: Indian Rupee’s Limited Upside
The RBI may intervene in non-deliverable forwards to support the Rupee, according to three traders cited by Reuters.
The HSBC Services PMI for India dropped to 60.3 in July, down from 60.5, and below the forecast of 61.6.
The US ISM Service Purchasing Managers Index (PMI) improved to 51.4 in July from 48.8 in June, surpassing the expected 51.0.
The US S&P Global Composite PMI declined to 54.3 in July from 55 in the previous month.
Chicago Fed President Austan Goolsbee stated that the Fed would respond if economic or financial conditions worsen.
San Francisco Fed President Mary Daly noted that the central bank will assess whether upcoming job market reports reflect ongoing trends or a reversal, indicating the Fed’s readiness to act based on new data.
Financial markets now predict an 85% chance that the Fed will cut rates by 50 bps in September, a significant increase from last week’s 11.5%, according to the CME FedWatch Tool.
Technical Analysis: USD/INR Outlook
The Indian Rupee strengthened during the day, maintaining a bullish outlook for the USD/INR pair on the daily chart. The pair remains above the key 100-day Exponential Moving Average (EMA) and is supported by an uptrend line since June 3. However, the 14-day Relative Strength Index (RSI) indicates an overbought condition above the 70.0 zone, suggesting potential consolidation before any near-term USD/INR appreciation.
The immediate resistance for the USD/INR pair is at the 84.00 psychological level, with any further buying likely propelling it to 84.50. Conversely, the initial downside target lies at the uptrend line around 83.78. A break below this level could lead to 83.51, the low of July 12, with a crucial support level at the 100-day EMA of 83.47.
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