USD/INR weakens amid Fed rate cut hopes, falling crude oil prices

July 8, 2024 6:48 am

  • The Indian Rupee gains ground in Monday’s early European session. 
  • Fed rate cut hopes and lower crude oil prices support the INR. 
  • The renewed US Dollar (USD) demand might limit Indian Rupee’s gains. 

The Indian Rupee (INR) strengthens on Monday. The expectation that the US Federal Reserve (Fed) might cut the interest rate in September has lifted the INR. Lower US interest rates could boost capital flows into higher-yielding emerging market assets, benefiting the Indian Rupee. Additionally, the decline of crude oil prices from a four-week high supports the local currency and helps to alleviate the INR’s depreciation, as India is the world’s third-biggest oil importer and consumer. 

Nonetheless, the renewed US Dollar (USD) demand amid the cautious mood might undermine the INR. Looking ahead, investors await the Fed’s Chair, Jerome Powell, who will testify  on Tuesday. The attention will shift to the US Consumer Price Index (CPI) inflation data for June, which is due on Thursday. 

Daily Digest Market Movers: Indian Rupee remains firm amid positive Indian economic outlook

  • “Asian FX took a breather on the back of broad US Dollar weakness … the risk for Asian currencies, though, remains skewed to the downside, with the Fed staying patient,” said Lloyd Chan, senior currency analyst at MUFG Bank.
  • Indian benchmark indices opened lower on Monday, with BSE Sensex slipping 161 points to 79,8835 points, while the Nifty50 index fell slightly by 0.06% to 24,310. 
  • Foreign Portfolio Investors (FPI) continued to show strong buying interest in Indian equities with net inflows of about $1 billion in the first week of July 2024, data with depositories showed. 
  • US Nonfarm Payrolls (NFP) came in stronger than expected, adding 206K net new jobs in June, according to the US Bureau of Labor Statistics (BLS) on Friday. The previous month saw a sharp downside revision to 218K from the initial reading of 272K.
  • The US Average Hourly Earnings declined to 3.9% YoY in June, compared to the previous reading of 4.1%. The Unemployment Rate rose to 4.1% for the first time since December 2021.
  • Financial markets are now pricing in a nearly 77% chance of a rate cut from the Fed in September, up from 70% before the US employment report, according to the CME FedWatch tool. 

Technical analysis: USD/INR continues oscillating within a range

The Indian Rupee trades on a stronger note on the day. The uptrend of the USD/INR pair prevails in the long term as it is above the key 100-day Exponential Moving Average (EMA) on the daily timeframe. 

In the near term, the pair has been capped within the familiar trading range for a couple of months already since March 21. The further consolidation looks favourable as the 14-day Relative Strength Index (RSI) hovers around the 50-midline, indicating neutral momentum. 

The first bullish target to watch for USD/INR is 83.60, a high of July 4. Further north, the next hurdle is seen at the record time of 83.75. A decisive break above this level will see a rally to the 84.00 psychological level.

On the flip side, the potential support level is located at 83.35, the 100-day EMA. A breach of this level will expose the 83.00 round mark, followed by 82.82, a low of January 12.

US Dollar price today

The table below shows the percentage change of US Dollar (USD) against listed major currencies today. US Dollar was the weakest against the Pound Sterling.

  USD EUR GBP CAD AUD JPY NZD CHF
USD   0.01% -0.03% 0.01% 0.03% -0.01% -0.02% 0.00%
EUR -0.01%   -0.04% -0.01% 0.01% -0.02% -0.02% 0.00%
GBP 0.02% 0.04%   0.04% 0.04% 0.01% 0.02% 0.03%
CAD 0.00% 0.01% -0.03%   0.01% -0.03% -0.01% -0.01%
AUD -0.03% 0.00% -0.04% -0.01%   -0.03% -0.02% -0.01%
JPY 0.00% 0.02% -0.03% 0.01% 0.06%   -0.02% 0.00%
NZD 0.02% 0.02% -0.02% 0.00% 0.03% 0.00%   0.02%
CHF 0.00% 0.00% -0.04% -0.01% 0.01% -0.01% -0.01%  

The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the Euro from the left column and move along the horizontal line to the Japanese Yen, the percentage change displayed in the box will represent EUR (base)/JPY (quote).

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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