USD/INR faces pressure at open ahead of Fed policy, US-data packed week
- The Indian Rupee ticks higher against the US Dollar despite US President Trump confirming US-EU trade deal.
- Investors expect the Fed to leave interest rates steady on Wednesday.
- Consistent outflow of foreign funds from Indian markets keeps the Indian Rupee on the back foot.
The Indian Rupee (INR) edges higher at open against the US Dollar (USD) on Monday. The USD/INR pair ticks down to near 86.60, while the US Dollar trades sideways even as the United States (US) and the European Union (EU) have reached a trade framework ahead of the August 1 tariff deadline over the weekend to avert a damaging trade war.
At the time of writing, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, flattens around 97.60.
According to the US-EU trade pact, Washington will receive 15% tariffs on all imports from Brussels, a number is lower than 30% that was threatened by President Donald Trump in the mid of this month. Still, the duty rate is higher than the zero-for-zero tariff proposed earlier by EU officials. Trade terms between the two are majorly similar to what Washington agreed with Japan last week.
The confirmation of the US-EU trade pact has undermined the uncertainty surrounding the August 1 tariff deadline as Washington has closed deals with its key trading partners, except its North American peers. Meanwhile, investors await high-stakes trade talks between the US and China in Stockholm, which will start from Monday.
According to the South China Morning Post (SCMP), Washington and Beijing are expected to extend their tariff truce for 90 days, which will expire on August 12.
Daily digest market movers: Indian Rupee ticks up against US Dollar
- The scenario of the US-EU trade deal should be favorable for the US Dollar. However, it struggles to attract bids as US President Trump has expressed confidence that Federal Reserve (Fed) Chair Jerome Powell could lower interest rates soon.
- "We had a very good meeting, I think we had a very good meeting on interest rates," Trump told reporters on Friday, Reuters reported. Such a scenario is unfavorable for the US Dollar as interest rate cuts by the Fed will increase the supply of Greenback into the economy.
- For fresh cues on the interest rate outlook, investors await the Fed’s monetary policy meeting, which is scheduled for Wednesday. According to the CME FedWatch tool, the Fed is certain to leave interest rates in the current range of 4.25%-4.50%. The commentary from Fed’s Powell will provide more color about his meeting with President Trump.
- This week, investors will also focus on an array of US economic data, including Personal Consumption Expenditure Price Index (PCE) and JOLTS Job Openings data for June, flash Q2 Gross Domestic Product (GDP), and the ISM Manufacturing PMI data for July.
- Though the Indian Rupee is outperforming the US Dollar, its outlook remains uncertain as Foreign Institutional Investors (FIIs) continue to pare stakes in Indian equities. On Friday, FIIs sold Rs. 1,979.96 crores worth of shares in the Indian equity market. So far, FIIs have pared stakes in Indian markets worth Rs. 30,508.66 crores.
- In Monday’s session, investors will focus on the Industrial and Manufacturing Output data for June, which will be published at 10:30 GMT. The Industrial Output is estimated to have grown at a faster pace of 2.4%, compared to the prior reading of 1.2%.
Technical Analysis: USD/INR retraces from monthly high of 86.80
USD/INR corrects to near 86.60 at open on Monday after posting a fresh monthly high near 86.80 last week. The near-term trend of the pair remains bullish as the 20-day Exponential Moving Average (EMA) slopes higher around 86.25.
The 14-day Relative Strength Index (RSI) broke above 60.00. A fresh bullish momentum would emerge if the RSI holds above that level.
Looking down, the 20-day EMA near 86.40 will act as key support for the major. On the upside, the June 23 high near 87.00 will be a critical hurdle for the pair.
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.
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