The Indian Rupee (INR) continued its decline against the US Dollar (USD) on Tuesday, with USD/INR climbing above 95.90. Last week, the pair fell just over 1% primarily due to rising US Treasury yields and high oil prices.
Indian currency markets were closed on Monday in observance of Ganesh Chaturthi. This week, the INR has been struggling, as 10-year US bond yields surged to 5.04%, marking the highest level in almost two decades. These rising yields reflect the strong expectation that the Federal Reserve (Fed) will announce an interest rate hike in its upcoming policy meeting.
The Fed’s hawkish outlook is being driven by recent data, particularly the unexpectedly high readings for the US Producer Price Index (PPI) and a persistent Consumer Price Index (CPI) for August.
As US Treasury yields rise, so does the strength of the US Dollar. The US Dollar Index (DXY), which measures the Greenback against six major currencies, has increased by 0.15%, nearing 99.62.
While an interest rate hike from the Fed seems almost guaranteed, market watchers will be keen to analyze the forthcoming monetary policy statement and Fed Chair Kevin Warsh’s press conference for insights on the future interest rate trajectory.
Analysts expect one hike in September, but not more
Economists at ING have adjusted their expectations, now predicting a 25 basis point hike from the Fed in September following Kevin Warsh’s comments at the Jackson Hole symposium. They noted that the data since then supports this outlook. While there’s usually an expectation of multiple hikes after an initial increase, the ING analysts suggest this may not be the case this time. Their forecasts for jobs and inflation indicate that a series of hikes may not be necessary.
Oil prices remain elevated due to supply worries
In the first trading session, the MCX Crude Oil contract set to expire on September 21 is up 1.8%, nearing Rs. 9,900. This price is close to a multi-month high of Rs. 10,043 reached last Friday.
Countries like India that are heavily reliant on oil imports often see their currencies weaken in a high-oil-price context.
Deutsche Bank analysts noted that the recent surge in oil prices follows a precautionary shut-down of a significant Saudi pipeline and the postponement of a meeting between Iran and Gulf states aimed at discussing a temporary shipping corridor through the Strait of Hormuz. These events have heightened market anxiety regarding supply security and key shipping paths in the region.
Retail inflation in India picks up speed
On Monday, India’s Ministry of Statistics reported that the retail CPI rose by 4.82% Year-on-Year (YoY), slightly higher than the expected 4.8% and up from the previous figure of 4.45%. Still, this data falls within the Reserve Bank of India’s (RBI) acceptable range of 2%-6%.
This faster-than-anticipated inflation at the retail level may lead to increased expectations for an interest rate increase from the RBI in the near future.
Technical insights on USD/INR
The USD/INR is trading significantly higher at around 95.92. The pair exhibits a bullish tilt in the short term, remaining above the 20-day exponential moving average (EMA) at 95.30, indicating that any dips could still find support as buyers retain control.
The Relative Strength Index (RSI) sits at 63.56, suggesting a strong upside momentum that isn’t yet overstretched.
On the downside, immediate support can be found at the 20-day EMA near 95.30, providing a safety net for any potential pullbacks, with 95.00 also acting as support. Looking upward, the pair may target revisiting the all-time high around 97.10.
