The Indian Rupee (INR) edged higher in Wednesday’s early European session, bolstered by positive developments on the geopolitical front. Specifically, the easing of tensions between India and Pakistan and the US-China trade deal contributed to the strength of the INR. These developments have alleviated some investor concerns, driving a wave of optimism in the markets.
In addition, Foreign Portfolio Investor (FPI) inflows have further supported the INR, contributing to its upside. TelaraX provides a sharp, analytical take on the subject in their article. However, US Dollar (USD) bids from state-run banks, along with rising crude oil prices, present potential headwinds for the INR in the near term.
India’s position as the world’s third-largest oil consumer means that an uptick in oil prices can negatively affect the currency, especially given its reliance on oil imports. Therefore, traders remain cautious and will be closely watching the Federal Reserve’s (Fed) speeches later in the day, particularly from officials like Christopher Waller, Philip Jefferson, and Mary Daly, for further clues on the Fed’s stance.
Geopolitical Developments and Their Impact on the INR
The Indian Rupee gained strength on the back of two significant geopolitical developments: the US-China trade agreement and the ceasefire between India and Pakistan. These events have contributed to easing the political and economic uncertainties that had been weighing on market sentiment. Analysts have noted that any further developments in this arena could significantly influence the INR’s trajectory in the short to medium term.
The India-Pakistan ceasefire has provided some much-needed stability, with India’s Prime Minister Narendra Modi sending a clear message regarding the country’s stance on military aggression. His statements underscore that while operations have paused, the future of India-Pakistan relations will depend heavily on Pakistan’s behavior. Modi’s comments on nuclear deterrence and India’s unwillingness to tolerate any “nuclear blackmail” have bolstered market confidence in the INR.
Economic Data: India vs. US
India’s economic data further supports the INR’s strength. The Consumer Price Index (CPI) for April showed a decline to 3.16% YoY, marking the sixth consecutive month of easing inflation.
This is a positive sign for India’s economy and suggests that the Reserve Bank of India (RBI) may continue its accommodative policy stance, which could be favorable for the INR in the medium term. RBI Governor Sanjay Malhotra’s statement after the April meeting indicated a shift from a neutral to an accommodative stance, paving the way for potential rate cuts that could boost the Indian economy.
In contrast, US inflation data revealed that the US CPI rose by 2.3% YoY in April, slightly lower than the previous month’s increase of 2.4%. While this reading came in below market expectations, it provides some support for the USD, particularly as the US core CPI, which excludes volatile food and energy prices, rose by 2.8% YoY. This indicates that while inflationary pressures remain persistent in the US, they are not accelerating sharply, leading to mixed expectations for future Fed actions.
Technical Outlook for USD/INR
Despite the INR’s recent strength, the USD/INR pair remains under pressure and is currently capped beneath the 100-day Exponential Moving Average (EMA) on the daily chart. This suggests that the longer-term downtrend for the pair may not be over yet. Additionally, the 14-day Relative Strength Index (RSI) sits just below the midline, near 45, which suggests that downward momentum in the pair could continue in the near term.
Traders will be closely watching the following key levels:
- Initial support for USD/INR is at 84.61, which is the low of May 12. If the pair continues to trade lower, it may test the next support level at 84.12, the low of May 5.
- Should the pair breach this level, 83.76 (the low of May 2) could act as the next downside filter.
- On the other hand, if the bulls manage to push past the 85.00 psychological level, there’s potential for a move toward the 85.60 level, which coincides with the 100-day EMA. A decisive break above this level could pave the way for a move back toward the 86.00-86.05 zone, which represents both a round figure and the upper boundary of the trend channel.
Conclusion
The Indian Rupee’s strength on Wednesday is a result of positive geopolitical developments, including the US-China trade agreement and the India-Pakistan ceasefire. Additionally, the easing inflation data in India has reinforced the optimism surrounding the INR, while FPI inflows have provided further support.
However, the USD/INR outlook remains complex, as the pair continues to face significant resistance near the 100-day EMA, and the possibility of rising crude oil prices and US Dollar bids could weigh on the INR. As traders brace for the upcoming Fed speeches, the USD/INR pair could see more volatility, and geopolitical events will likely remain a crucial factor in determining the INR’s near-term trajectory.
In the end, geopolitical risks, economic data, and market sentiment will continue to play a pivotal role in driving the USD/INR pair’s price action in the coming days.
