USD/INR falls further ahead of Fed policy
|- The Indian Rupee jumps to near 87.90 against the US Dollar as both the US and India signal optimism on a trade deal.
- US President Trump appreciated Indian PM Modi’s efforts to end the Russia-Ukraine war.
- Investors are certain that the Fed will cut interest rates on Wednesday.
The Indian Rupee (INR) extends its upside against the US Dollar (USD) for the fourth trading day in a row on Wednesday. The USD/INR pair posts a fresh two-week high around 87.90 as the Indian Rupee strengthens, following signals from United States (US) President Donald Trump and India’s Prime Minister Narendra Modi that they will reach a trade agreement soon.
On Tuesday, US President Trump stated through a post on Truth.Social that he had a positive call with India’s PM Modi over bilateral relations and thanked him for his efforts towards ending the war between Russia and Ukraine. Before Trump’s post, Modi also stated that India supports President Trump’s initiatives towards a “peaceful resolution of the Ukraine conflict”.
These comments came after top negotiators from the US and India had trade talks in New Delhi. A spokesperson from the US embassy stated that Washington had a positive meeting with India’s chief negotiator Rajesh Aggarwal on bilateral trade. Neither nation provided clarity on trade terms, and when they could reach an agreement, but hinted that they would continue discussing trade virtually.
Positive comments from Washington and New Delhi on trade are favorable for the Indian Rupee, as the currency came out as a major victim of trade tensions between both nations. Trade relations between the US and India were badly impacted after President Trump increased tariffs on New Delhi to 50% for buying Oil from Russia.
Increasing hopes of a trade truce between the US and India have also led to a slowdown in selling from overseas investors in Indian stock markets. So far in September, Foreign Institutional Investors (FIIs) have sold equity shares worth Rs. 10,204.54 crores. In August and July, FIIs pared stake worth Rs. 46,902.92 and 47,666.68 crores, respectively.
The table below shows the percentage change of Indian Rupee (INR) against listed major currencies today. Indian Rupee was the strongest against the Swiss Franc.
| USD | EUR | GBP | JPY | CAD | AUD | INR | CHF | |
|---|---|---|---|---|---|---|---|---|
| USD | 0.13% | 0.07% | 0.04% | 0.10% | 0.07% | -0.15% | 0.20% | |
| EUR | -0.13% | -0.07% | -0.09% | -0.01% | 0.07% | -0.20% | 0.07% | |
| GBP | -0.07% | 0.07% | -0.02% | 0.06% | -0.02% | -0.20% | 0.06% | |
| JPY | -0.04% | 0.09% | 0.02% | 0.04% | 0.12% | -0.20% | 0.01% | |
| CAD | -0.10% | 0.00% | -0.06% | -0.04% | 0.04% | -0.24% | 0.08% | |
| AUD | -0.07% | -0.07% | 0.02% | -0.12% | -0.04% | -0.23% | -0.00% | |
| INR | 0.15% | 0.20% | 0.20% | 0.20% | 0.24% | 0.23% | 0.27% | |
| CHF | -0.20% | -0.07% | -0.06% | -0.01% | -0.08% | 0.00% | -0.27% |
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 Indian Rupee from the left column and move along the horizontal line to the US Dollar, the percentage change displayed in the box will represent INR (base)/USD (quote).
Daily digest market movers: Fed dovish expectations weaken US Dollar
- The downside move in the USD/INR pair is also driven by a significant weakness in the US Dollar. At the time of writing, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades close to a fresh two-month low around 96.70 posted on Tuesday.
- The US Dollar has been hit hard due to firm expectations that the Federal Reserve (Fed) will start the monetary-easing campaign in its policy announcement at 18:00 GMT. According to the CME FedWatch tool, there is a 96% chance that the Fed will reduce interest rates by 25 basis points (bps) to 4.00%-4.25%, while the rest support a bigger reduction of 50 bps.
- More than the Fed’s interest rate decision, investors will focus on the dot plot, which shows where policymakers see borrowing rates heading in the near and long term. According to analysts from Barclays, the Fed’s latest median projections for interest rates are likely to call for three interest rate cuts by 2025.
- Apart from the Fed’s interest rate projections, investors will also focus on Chair Jerome Powell’s press conference to know about the labor market outlook and whether tariffs stand a chance to boost inflationary pressure further in the near term.
- Meanwhile, Fed Governor Lisa Cook is set to participate in Wednesday’s policy meeting as a US appeals court has blocked US President Trump’s decision to fire Cook over mortgage allegations.
- On the economic data front, US Retail Sales have grown steadily by 0.6% in August, faster than expectations of 0.2%.
Technical Analysis: USD/INR sees cushion near 87.65
USD/INR slides to near 87.90 on Wednesday, the lowest level seen in two weeks. The pair has corrected to near the 20-day Exponential Moving Average (EMA), which is around 88.00, suggesting uncertainty in the near-term trend.
The 14-day Relative Strength Index (RSI) declines to near 50.00, indicating that the bullish momentum has run its course for now. However, the bullish bias remains intact.
Looking down, the August 28 low of 87.66 will act as key support for the major. On the upside, the September 11 high of 88.65 would be the key hurdle for the pair.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
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