- The Indian Rupee trades higher against the US Dollar at the start of the week.
- Market experts warn INR’s rally due to strong FCNR(B) deposits could be capped.
- Investors shift their focus to the US CPI data for August.
The Indian Rupee (INR) gains against the US Dollar (USD) at the start of the week. The USD/INR pair drops to near 94.38 as the significant increase in forex reserves due to overwhelming response by Non-Residents to Reserve Bank of India’s (RBI) special foreign deposits window has strengthened the Indian currency.
INR outperformance underpinned by RBI Dollar inflows and reduced left-tail risks
Analysts at MUFG highlight that the Indian Rupee has been a notable outperformer, pointing to “strong outperformance in the Indian Rupee, driven by much higher-than-expected Dollar inflows from RBI’s FCNR(B) FX measures, reaching above US$130bn in total as of 31 Aug.”
The bank advised that investors should not be gung-ho about the Indian currency, as it still thinks USD/INR should trend higher over time. But it ruled out the possibility of a sharp INR depreciation, clarifying that RBI’s FX measures have given authorities meaningful firepower and ammunition.
Higher oil prices could weigh on INR
Rising oil prices due to restricted energy supply through the Strait of Hormuz on the back of US-Iran conflicts could dent the rally in the Indian Rupee.
The continued exchange of attacks between the US and Iran regarding the control of Hormuz is keeping oil prices higher.
On Sunday, the Iranian government said that it targeted three oil tankers using an unauthorized route through the Strait of Hormuz, as well as a number of US-linked ships, in retaliation for US attacks on Iranian tankers over the weekend.
In the opening session on Monday, the MCX Crude Oil contract expiring on September 21 is up 1.75% to near Rs. 8,730, closer to its over three-month high of Rs. 8,791.
US Inflation data in focus
This week, the major event for global markets is expected to be the US Consumer Price Index (CPI) data for August, which will be published on Friday.
Investors will closely track the data as Fed Chairman Kevin Warsh has warned of upside inflation risks several times and has stated that the central bank is committed to bringing price pressures down.
However, recent comments from board members: New York Fed Bank President John Williams and Governor Christopher Waller have signaled that recent data on inflation has been “encouraging”.
Meanwhile, traders are expected to reassess the Fed’s interest rate expectations due to stronger-than-expected Nonfarm Payrolls data for August released on Friday. The data showed that employers hired 162K fresh workers, significantly higher than 56K estimate. July’s NFP data was also revised higher to 21K from -23K.
Currently, the CME FedWatch tool shows a 58% chance that the Fed will hike interest rates at the policy meeting next week.
USD/INR Technical Analysis
In the daily chart, USD/INR trades at 94.45. The pair maintains a bearish near-term bias as price holds below the 20-day Exponential Moving Average (EMA) at 95.17.
The shift in the Relative Strength Index (14) range from the 40.00-60.00 zone to below 40.00 suggests downside momentum remains dominant but also warns that selling pressure could be stretched.
On the downside, the June low at 94.15 will be the key support level for the USD/INR pair. On the topside, the 20-day EMA at 95.15 stands as the first meaningful resistance that the pair would need to reclaim to ease the current bearish tone and open the door to a corrective rebound.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
Economic Indicator
Nonfarm Payrolls
The Nonfarm Payrolls release presents the number of new jobs created in the US during the previous month in all non-agricultural businesses; it is released by the US Bureau of Labor Statistics (BLS). The monthly changes in payrolls can be extremely volatile. The number is also subject to strong reviews, which can also trigger volatility in the Forex board. Generally speaking, a high reading is seen as bullish for the US Dollar (USD), while a low reading is seen as bearish, although previous months' reviews and the Unemployment Rate are as relevant as the headline figure. The market's reaction, therefore, depends on how the market assesses all the data contained in the BLS report as a whole.
Read more.America’s monthly jobs report is considered the most important economic indicator for forex traders. Released on the first Friday following the reported month, the change in the number of positions is closely correlated with the overall performance of the economy and is monitored by policymakers. Full employment is one of the Federal Reserve’s mandates and it considers developments in the labor market when setting its policies, thus impacting currencies. Despite several leading indicators shaping estimates, Nonfarm Payrolls tend to surprise markets and trigger substantial volatility. Actual figures beating the consensus tend to be USD bullish.
Sagar Dua is associated with the financial markets from his college days. Along with pursuing post-graduation in Commerce in 2014, he started his markets training with chart analysis.