The Indian rupee slumped this week, and was nearing its all-time low against the US dollar as investors waited for next week’s Reserve Bank of India (RBI) decision. It also rose to a high of 83.93 ahead of the upcoming US nonfarm payrolls (NFP) data.
US NFP data ahead
The USD/INR exchange rate rose as the rising geopolitical risks led to more US dollar demand. Most of these geopolitical risks are coming from the Middle East, where the escalation between Iran and Israel is rising.
In a statement on Thursday, President Biden said that he supported a strong retaliation from Israel after Iran fired hundreds of missiles.
While he resists bombing if Iran’s nuclear sites, Biden has said that he he supports attacking of its oil infrastructure, a situation that will lead to more escalation.
Attacking Iran’s oil terminals will likely lead to a forceful retaliation, and possibly a wider war in the region whose impact will higher energy prices. The US dollar often rises when there are significant geopolitical riks.
Indeed, data shows that the US dollar index (DXY) bounced back this week, rising from $100.1 to 101.90. The currency rose against most developed and emerging market currencies.
In addition to its role as a safe haven, the greenback jumped because a wider conflict will reduce the pace of inflation slowdown in the US. As a result, as Jerome Powell said on Monday, the Federal Reserve will likely embrace a gradual pace of rate cuts.
The next important catalyst for the USD/INR exchange rate will be the upcoming US nonfarm payrolls (NFP) data. Analysts expect the data to show that the headline NFP rose from 148k in September from 142k in the previous month.
Traders will look at the revised figure for August since the agency has revised it downwards several times in the past few months.
The unemployment rate is expected to remain unchanged at 4.2% while the average hourly earnings is expected to slow from 3.8% in August to 3.3% in September.
US jobs numbers have become very important because the Fed has put more emphasis on them now that inflation is moving downwards. A report by ADP showed that the private sector created over 140k jobs in August while another one by the BLS revealed that vacancies rose in August.
RBI interest ate decision
The next important catalyst for the USD/INR exchange rate will be the next interest rate decision by the Reserve Bank of India, which will happen on October 9.
The decision will come at a time when India’s inflation has remained stubbornly high mostly because of food prices. Data showed that the headline Consumer Price Index (CPI) rose from 3.6% in July to 3.65% in August, higher than the median estimate of 3.55%.
Still, India’s inflation remains significantly lower than last year’s high of 7.4%. Therefore, the RBI is under pressure to signal when it will start cutting interest rates since since inflation is near its target level.
Analysts expect the RBI will leave interest rates unchanged in this meeting, and then hint towards a cut either in December or in January.
Besides, other foreign emerging market central banks like in South Africa, Indonesia, and Hong Kong have all slashed rates recently. Also, data showed that India’s economic output was slowing.
The Indian rupee has also dropped because of China’s comeback. Analysts expect that some of the foreign capital that would have gone to India has started moving to China. Indeed, the Chinese yuan has surged to its highest point in months. In a note, an analysts at TS Lombard said:
“The MPC is unlikely to make a sharp pivot in October as the internal RBI members remain the same for now and Governor Das has the casting vote in case of any tie.”
USD/INR technical analysis
USD/INR chart by TradingView
The weekly chart shows that the USD/INR exchange rate has been in a steady bull run in the past few years. It has jumped from 71 in 2021 to almost 84, and analysts Mizuho sees it rising to 84.1 by the end of the year.
On the positive side for the Indian rupee is that the USD/INR has formed a rising wedge chart pattern on the weekly chart. This pattern is made up of two ascending and converging trendlines. These lines are now nearing their apex, meaning that a major bearish breakout may happen.
If this happens, it means that the USD to INR exchange rate will retreat to the next key support at 81.64, its lowest point since April last year. Such a drop would imply a dip of 2.80% from the current level.
However, a move above the rising wedge part of 84.2 will invalidate the bearish view and point to more rupee weakness.
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