Indian Rupee opens flat as stronger US Dollar offsets lower crude prices
- The Indian Rupee has a flat opening against the US Dollar on Thursday.
- A stronger US Dollar due to a sticky US PCE Inflation report has offset lower oil prices.
- Investors keenly await Fed Chair Warsh’s remarks at the Jackson Hole Symposium.
The Indian Rupee (INR) opens on a flat note against the US Dollar (USD) on Thursday after a holiday the previous day. Still, USD/INR is close to its 10-day low of 95.40. The pair was expected to open positive due to lower oil prices; however, the recovery move in the US Dollar on Wednesday on the back of sticky United States (US) Personal Consumption Expenditure (PCE) Price Index report for July has offset the same.
At press time, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, holds onto Wednesday’s gains near 99.15.
US PCE inflation accelerates at faster-than-expected pace in July
On Wednesday, the US Bureau of Economic Analysis (BEA) reported that the core PCE inflation, which is closely tracked by Federal Reserve (Fed) officials, arrived in line with estimates and the prior release of 3.3% Year-on-Year (YoY). The headline PCE Price Index also grew at a steady pace of 3.7% YoY, while it was expected to cool down to 3.6%.
Signs of price pressures remaining sticky are expected to keep fears of Federal Reserve (Fed) interest rate hikes this year intact.
However, there has been no change observed in the Fed’s interest rate expectations for the September meeting after the inflation data release as of now.
According to the CME FedWatch tool, the odds of the Fed leaving interest rates unchanged in the September policy meeting are almost steady at 64%.
Jackson Hole Symposium awaited
The next major trigger for global financial markets could be remarks from Fed Chairman Kevin Warsh at the Jackson Hole Symposium.
Strategists at DBS flag Fed Chairman Kevin Warsh’s Jackson Hole keynote on Friday, August 28, as “the most important event this week,” but stress that the symposium is being “viewed more as a credibility event rather than a rate-signalling one.”
In their view, “Warsh faces a difficult balancing act: defending the Fed’s independence and price-stability mandate while providing greater clarity on the Fed’s reaction function without abandoning his preference for less forward guidance.”
Iran and Oman reach Hormuz deal
The confirmation from the Islamic Revolutionary Guard Corps (IRGC) that it has reached a revenue-sharing agreement with Oman on the Strait of Hormuz, a critical chokepoint for almost one-fifth of global energy supply, has weighed on oil prices.
However, the IRGC clarified that the reopening of the Strait of Hormuz will take more than just a deal with Oman.
In the opening session, the MCX Crude Oil contract expiring on September 21 is 0.75% lower at around Rs. 7,834.
Lower oil prices bode well for currencies from economies such as India, which rely heavily on oil imports to meet their energy needs.
USD/INR Technical Analysis
In the daily chart, USD/INR trades at 95.42, keeping a mildly bearish near-term tone as it slips just beneath the 20-period exponential moving average (EMA) at 95.5543. Broadly, the triangle formation reflects a sharp volatility contraction, which indicates a sideways trend.
The Relative Strength Index (14) inside the 40.00-60.00 zone also signifies indecisiveness among investors.
On the topside, initial resistance is seen at the 20-period EMA at 95.55, followed higher by the downward trendline break level near 96.5178. On the downside, immediate support aligns with the rising trendline break price at 95.40, with a deeper floor emerging at the trendline start point around 94.16, where buyers would be expected to defend the broader uptrend.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
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.