The USD/INR currency pair opened lower on Wednesday as the pair encountered huge selling pressure. It has seen a new three-week low underneath the mark at 88.10. The drop comes on the heels of a similar breakdown of a three-week consolidation that had developed between 88.75 and 89.10. The dynamics of that market are changing pretty drastically. This shift is the product of many forces, including increased trade tensions and the moves in the Indian central bank.
As the US dollar follows through on its weakness, the Indian rupee impressively follows through on its strength. The short term trading environment is characterized by great uncertainty about the likely trend direction for the USD/INR pair in the immediate future. Specifically, it is currently retesting the area under the 20-day Exponential Moving Average (EMA) at ~88.69. The currency pair’s key resistance is at its former all-time high of 89.12, where many prior traders will be looking to sell it short.
Factors Influencing the Currency Pair
The USD/INR pair is significantly affected by global economic conditions and geopolitical factors. Trade tensions between the United States and India have recrudescenced recently. This major escalation is a consequence of New Delhi’s recent announcement that it would purchase oil from Russia. This development is a third complicating factor in the currency dynamics, weighing on investor sentiment for both currencies. Moreover, the backdrop of escalating trade tensions between the US and China adds another layer of uncertainty to the mix.
The US Dollar Index (DXY), which measures the currency against a basket of its peers, is trading 0.15% lower at around 98.85. This performance plays a critical role in shaping the USD/INR exchange rate. A US dollar that is weak in real effective terms normally augurs well for the INR — so this too is playing into the current market movements.
“Economic activity data are surprising to the upside, creating some tension with the labor market data,” – Jerome Powell
Therefore, the signals from Federal Reserve officials that domestic economic conditions are driving currency movements of late. The market is reacting to higher interest rates overall, especially real rates, which are positive for the INR.
Market Responses and Investor Behavior
This has led to mixed reactions from investors with the recent volatility observed in the USD/INR pair. Foreign Institutional Investors (FIIs) have net sold aggressively shares worth Rs. 1,508.53 crores in the Indian equity market. This action demonstrates their dovish broodiness amidst a backdrop of increasing market volatility. This uneven selling pressure has an obvious impact on the demand for the rupee.
The Reserve Bank of India is stepping up intervention in the forex market. Against this backdrop, the RBI is extremely burning through dollars to prop up the rupee. These actions typically increase short-term volatility but are designed to heal the short-term volatility and stabilize the currency during difficult circumstances.
Buoyant economic projections should lend some cushion to the rupee. The International Monetary Fund (IMF) just increased its growth forecast for India for the current fiscal year to 6.6%. This is an upward revision of 0.2% from its last forecast. A stronger growth outlook should lure more investment from abroad, boosting a key source of demand for the rupee.
“I continue to see two more cuts before the end of this year,” – Michelle Bowman
This anticipation of interest rate cuts by Federal Reserve officials could influence market expectations and trading strategies related to the USD/INR pair.
Technical Indicators and Future Outlook
From a technically driven/timing analysis traders have had to reevaluate positions following USD/INR pair’s sharp decline. The 14-day Relative Strength Index (RSI) has fallen below the key 50.00 level. This indicates a change in momentum potentially toward the downside in the short term.
Along with this important technical indicator, traders will be looking closely at key support levels. Support is represented by the September 17 low of 87.70. This level may be pivotal in dictating the immediate upwards or downwards price action for the USD/INR pair.
If so, market participants will have to tread lightly through these complexities. Domestic and international currency dynamics are evolving, driven by ever-changing factors. Economic growth forecasts, central bank intervention divergence, and geopolitical tensions are all at work. These factors will be playing a big role in determining the future of the USD/INR pair in the coming weeks.