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Rupee eases below 79.50 on worries of aggressive Fed policy, eye on US/India inflation

  • USD/INR takes bids to print four-day uptrend, updates daily highs of late.
  • Fed rate futures indicate a 73% chance of a 0.75% rate hike in September after May’s upbeat US jobs report.
  • A test of recovery in oil prices pair sellers cheer hawkish RBI moves.
  • US CPI on Wednesday, India CPI on Friday will be crucial for short-term directions.

USD/INR prints a four-day uptrend around 79.48 as the US dollar cheers hawkish Fed bets during early Monday morning in Europe. Underpinning the Indian Rupee (INR) pair’s run-up are recently firmer oil prices and market fears that the Reserve Bank of India’s (RBI) rate hike will have little impact.

WTI crude oil prices extended the previous day’s rebound from a six-month low toward $89.00 heading into Monday’s European session. Black gold’s recent rebound may be linked to robust China trade numbers.

China’s trade numbers in June marked upbeat results with exports rising the most over the year. The trade balance rose to $101.26B vs. $90B forecasts and $97.94B. Further details indicated that exports increased by 18% compared to 15% and 17.9% expected while imports decreased to 2.3% compared to 3.7% expected and 1.0%.

Elsewhere, the interest rate outlook suggests a 73% chance of a 75 basis points (bps) rate hike by the Fed in September. Odds of a Fed hike jumped after a strong US jobs report in July. Accordingly, Nonfarm Payrolls (NFP) rose to 528K vs. 250K expected and earlier revised upwards by 398K. Moreover, the unemployment rate was 3.6% expected and decreased to 3.5% compared to previous readings.

Following the data, San Francisco Fed President Mary Daly said over the weekend that the Fed was far from combating inflation. Policymakers also added, “A 50 bps hike is definitely in play. We must keep an open mind. In the same vein, Fed Governor Michelle Bowman said, “The Fed should consider a further 75 basis-point interest rate hike at upcoming meetings to bring inflation back to the central bank’s target.”

RBI’s 0.50% rate hike failed to impress INR bulls amid widespread fears of inflation and recession, particularly in Asia amid the US-China spat over Taiwan. Reuters has come out with news indicating that China is ready for ‘regular’ military drills east of the Taiwan Strait’s center line. The Dragon Nation’s Foreign Ministry announced on Friday that it will grant US House of Representatives Speaker Nancy Pelosi permission to visit Taiwan. On the other hand, Taiwan’s Ministry of Defense reported that 66 Chinese aircraft were carrying out activities in the Taiwan Strait as of 5pm local time on Sunday. Furthermore, US Secretary of State Anthony Blinken mentioned that China’s provocative actions have increased significantly.

Looking ahead, monthly inflation numbers from the US and India will be crucial for USD/INR buyers amid hopes of returning the 80.00 psychological magnet to the chart.

Technical analysis

A daily close above the three-week-old descending resistance line around 79.60 is necessary for USD/INR buyers to retain control. Until then, chances of witnessing a pullback towards the 50-DMA support near 78.80 cannot be ruled out.

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