USD/INR refreshes weekly low even as US-China signals to ease export controls
- USD/INR falls below 85.50 at open, while the US Dollar steadies after the US and China reach a framework on a trade deal.
- The US inflation is expected to have grown at a faster pace in May.
- Higher foreign inflows and a likely decline in oil prices have strengthened the Indian Rupee.
The Indian Rupee (INR) posts a fresh weekly high near 85.47 against the US Dollar (USD) in the opening session on Wednesday. The US Dollar trades calmly after the White House signaled a positive outcome from the two-day meeting between trade negotiators from the United States and China in London. The US Dollar Index (DXY), which gauges the Greenback’s value against six major currencies, ticks up to near 99.15.
US Secretary of Commerce Howard Lutnick told reporters that both nations reached a “framework” to implement the trade deal made in Geneva in May, if approved by President Donald Trump. Lutnick expressed confidence that China would curb non-tariff barriers on the export of “rare earth and magnets”, and Washington would also roll back export restrictions on sophisticated chips.
Meanwhile, the Chinese ministry has also expressed a positive outcome from trade talks with Washington and stated that the agreement will now be forwarded to President Xi Jinping for approval.
The US Dollar trades steadily after the US-China trade agreement, which was expected to perform strongly on de-escalation in trade tensions between the two nations. Analysts at National Australia Bank stated that the “devil is going to be in the details and importantly whether this can help to reestablish trust between President Xi and President Trump, which has clearly been broken since the Geneva Agreement was published”.
On the legislative front, the US Federal Appeals court has stated that tariffs imposed by Donald Trump relating to border negligence and those announced on so-called “Liberation Day” on April 2 will remain in effect until they get proven whether they are permissible under the emergency act or not. The next argument regarding the sustainability of the above-mentioned tariffs will take place on July 31.
Daily digest market movers: Indian Rupee appreciates against US Dollar ahead of US inflation data
- The Indian Rupee extends its winning streak for the fifth straight trading day on Wednesday against the US Dollar ahead of the US Consumer Price Index (CPI) data for May, which will be published at 12:30 GMT.
- The US CPI report is expected to show that the headline inflation rose at a faster pace of 2.5% year-on-year, compared to a 2.3% growth seen in April. In the same period, the core CPI – which excludes volatile food and energy prices – accelerated to 2.9% from the prior reading of 2.8%. On month, the headline and the core CPI rose by 0.2% and 0.3% respectively.
- The scenario of high inflation growth would limit Federal Reserve (Fed) policymakers from lowering interest rates. However, soft inflation figures are unlikely to prompt officials to endorse early interest rate cuts, assuming they are more focused on stabilizing de-anchored consumer inflation expectations, fuelled by the implementation of new economic policies by US President Trump.
- According to the CME FedWatch tool, the Fed will not reduce interest rates in the June and July policy meetings.
- In the Asian region, strong foreign inflows and a likely decline in the Oil price has strengthened the Indian Rupee. On Tuesday, the data from Indian exchanges showed that Foreign Institutional Investors (FIIs) were net buyers, pumping Rs 2,301.87 crore into equity markets.
- Meanwhile, the US Energy Information Administration (EIA) cites demand concerns and rising output as factors that could lead to a decline in the international benchmark Brent crude to $61/bbl by the end of 2025. Lower Oil prices bode well for the INR, given that India is one of the world's leading importers.
- On the economic front, investors await the release of the Indian CPI data for May, scheduled for Thursday. Inflationary pressures are expected to have risen by 3% year-on-year, slower than the 3.16% growth seen in April.
- Signs of cooling price pressures would prompt market expectations that the Reserve Bank of India (RBI) could reduce interest rates again. In last week’s policy meeting, the RBI unexpectedly slashed the Repo Rate by 50 basis points (bps) to 5.5% and guided little room for further monetary policy expansion.
Technical Analysis: USD/INR struggles to hold 20-day EMA
The USD/INR pair refreshes the weekly low near 85.47 during Asian trading hours on Wednesday. The outlook of the pair is uncertain as it struggles to hold the 20-day Exponential Moving Average (EMA), which trades around 85.49.
The 14-day Relative Strength Index (RSI) hovers inside the 40.00-60.00 range, indicating a sideways trend.
Looking down, the June 3 low of 85.30 is a key support level for the major. A downside break below the same could expose it to the May 26 low of 84.78. On the upside, the pair could revisit an over 11-week high around 86.70 after breaking above the May 22 high of 86.10.
Indian Rupee FAQs
The Indian Rupee (INR) is one of the most sensitive currencies to external factors. The price of Crude Oil (the country is highly dependent on imported Oil), the value of the US Dollar – most trade is conducted in USD – and the level of foreign investment, are all influential. Direct intervention by the Reserve Bank of India (RBI) in FX markets to keep the exchange rate stable, as well as the level of interest rates set by the RBI, are further major influencing factors on the Rupee.
The Reserve Bank of India (RBI) actively intervenes in forex markets to maintain a stable exchange rate, to help facilitate trade. In addition, the RBI tries to maintain the inflation rate at its 4% target by adjusting interest rates. Higher interest rates usually strengthen the Rupee. This is due to the role of the ‘carry trade’ in which investors borrow in countries with lower interest rates so as to place their money in countries’ offering relatively higher interest rates and profit from the difference.
Macroeconomic factors that influence the value of the Rupee include inflation, interest rates, the economic growth rate (GDP), the balance of trade, and inflows from foreign investment. A higher growth rate can lead to more overseas investment, pushing up demand for the Rupee. A less negative balance of trade will eventually lead to a stronger Rupee. Higher interest rates, especially real rates (interest rates less inflation) are also positive for the Rupee. A risk-on environment can lead to greater inflows of Foreign Direct and Indirect Investment (FDI and FII), which also benefit the Rupee.
Higher inflation, particularly, if it is comparatively higher than India’s peers, is generally negative for the currency as it reflects devaluation through oversupply. Inflation also increases the cost of exports, leading to more Rupees being sold to purchase foreign imports, which is Rupee-negative. At the same time, higher inflation usually leads to the Reserve Bank of India (RBI) raising interest rates and this can be positive for the Rupee, due to increased demand from international investors. The opposite effect is true of lower inflation.
Recommended Articles
