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USD/INR is ahead of the Fed’s interest rate decision

Posted on by Pranco
USD/INR is ahead of the Fed’s interest rate decision

  • The Indian rupee loses ground during Thursday’s early Europan session.
  • The strengthening of the USD and higher bond yields could limit the upside of the INR.
  • The interest rate decision of the American Fed will be central on Thursday.

The Indian Rupee (INR) is losing momentum on Thursday. A demonstration in the US dollar (USD) and higher bond yields following Donald Trump’s victory in the US presidential elections are supporting the pair. Market participants expect the INR to trade within this range on Thursday as the Reserve Bank of India (RBI) is expected to intervene in the market by selling the USD to avoid excessive volatility.

Meanwhile, continued foreign fund outflows due to bond and foreign currency volatility could put some selling pressure on the INR in the short term. Investors will be watching the US closely Federal Reserve (Fed) meeting on Thursday, which is expected to cut rates rates by 25 basis points (bps). The American weekly Initial Jobless Claims will also be published.

Daily Digest Market Movers: Indian Rupee Falls, With All Eyes on Fed Meeting

  • “The rupee has been trading in a narrow range for the past two years and was also a bit overvalued. But with the dollar index rising and other Asian currencies depreciating, there will also be an impact on the rupee,” said Gopal Tripathi, head of finance and capital markets at Jana Small Finance Bank.
  • HSBC India Services’ PMI rose to 58.5 in October from 57.7 in September, surpassing a preliminary estimate of 58.3.
  • “In October, India’s services sector experienced strong growth in output and consumer demand, as well as job creation,” said Pranjul Bhandari, chief India economist at HSBC.
  • A narrow majority of economists in a Reuters poll expected the RBI to cut rates by 25 basis points to 6.25% in December.
  • According to CME’s FedWatch tool, financial markets are now pricing in a nearly 98% chance of a quarter-point cut and a nearly 70% chance of a similar-sized move in December. However, traders have started lowering their expectations for the number of rate cuts expected next year.

Technical Analysis: The constructive outlook for USD/INR remains unchanged, with an eye on the overbought RSI

The Indian rupee recovers on the day. Technically, the positive view on the USD/INR pair prevails as the pair remains above the key 100-day Exponential Moving Average (EMA) on the daily time frame. However, the 14-day Relative Strength Index (RSI) is above the centerline near 73.45, indicating an overbought RSI condition. This suggests that further consolidation cannot be ruled out until positioning is made for any near-term USD/INR appreciation.

The crucial resistance level for USD/INR emerges near the upper boundary of the ascending trend channel at 84.30. The additional upside filter to watch is 84.50, followed by the psychological level of 85.00.

On the other hand, the trend channel lower boundary and the October 11 high in the 84.05-84.10 zone act as an initial support level for the pair. A break from this level could pave the way to 83.80, the 100-day EMA. Sustained losses could see a drop to 83.46, the September 24 low.

Frequently Asked Questions about RBI

The role of the Reserve Bank of India (RBI) is, in its own words, “…maintaining price stability, while keeping in mind the objective of growth.” This involves keeping inflation at a stable level of 4%, mainly using the tool of interest rates. The RBI also keeps the exchange rate at a level that will not cause excessive volatility and problems for exporters and importers as the Indian economy is highly dependent on interest rates. foreign trade, especially oil.

The RBI formally meets six times a year to discuss its monetary policy and, if necessary, adjust interest rates. When inflation is too high (above the 4% target), the RBI will normally raise interest rates to deter borrowing and spending, which can support the rupee (INR). If inflation falls too far below target, the RBI could cut rates to encourage more lending, which could be negative for the INR.

Due to the importance of trade to the economy, the Reserve Bank of India (RBI) actively intervenes in the foreign exchange markets to keep the exchange rate within a narrow range. This is done to ensure that Indian importers and exporters are not exposed to unnecessary currency risk during periods of currency volatility. The RBI buys and sells rupees in the spot market at key levels and uses derivatives to hedge its positions.