USD/INR trades firmly as inflation in India cools down again

The Indian Rupee (INR) declines against the US Dollar (USD) at the start of the week, sending the USD/INR pair higher to near 86.15. The pair strengthens as the Indian currency underperforms, following soft Consumer Price Index (CPI) and a surprise decline in the Wholesale Price Index (WPI) Inflation data for June, a key indicator that measures inflation at the producer level.

Indian Ministry of Statistics and Programme Implementation has reported that the headline inflation grew at a moderate pace of 2.1% on year, compared to expectations of 2.5% and a 2.82% growth seen in May. This is the fifth straight month when the headline CPI has remained lower than the RBI's target of 3.7% for the current financial year, which it set in June’s policy meeting after front-loading interest rate cuts.

Meanwhile, the WPI report showed that the inflation at the producer level surprisingly declined by 0.13% on year. Economists expected the WPI Inflation to have grown at a faster pace of 0.52%, compared to a 0.39% growth seen in May. According to the report, lower food and energy prices contributed significantly to a decline in WPI inflation.

Soft consumer and WPI inflation data are expected to boost market expectations that the Reserve Bank of India (RBI) will cut interest rates again in the policy meeting next month.

Daily digest market movers: Indian Rupee underperforms, India-US CPI in focus

• The Indian Rupee trades lower against the US Dollar as the latter extends its upside amid increased demand for safe-haven assets, following the announcement of higher import duties by United States (US) President Donald Trump on key trading partners, the European Union (EU) and Mexico.
• At the time of writing, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades firmly near 98.00, the highest level seen in over two weeks.
• Over the weekend, US President Trump rekindled global trade jitters after sending letters to the European Union (EU) and Mexico, dictating 30% tariffs that will be separate from sectoral levies and warning that any retaliatory measures will be met by further increases in import duties.
• The announcement has led to a sharp decline in riskier assets. US equity futures have extended Friday’s losses, and risk-perceived currencies, such as the Indian Rupee, are underperforming, demonstrating a risk-aversion market mood.
• Last week, US President Trump also announced 25% tariffs on Japan and 35% on Canada, along with 50% on imports of copper.
• On the domestic front, investors will also focus on the CPI data for June, which will be released on Tuesday. The CPI report is expected to show that price pressures grew at a faster pace, a scenario that will discourage Federal Reserve (Fed) officials from cutting interest rates in the September meeting. According to the CME FedWatch tool, there is a 62.8% chance that the Fed will reduce interest rates in September.
• Meanwhile, uncertainty surrounding the trade deal between the US and India has kept the Indian Rupee on the back foot. US President Trump has stated a couple of times that Washington is close to securing a trade pact with India, but has not announced it officially.
• However, a report from Bloomberg over the weekend has boosted investors' confidence that the US and India are close to striking a trade agreement, as it stated that the South-Asian nation doesn’t expect to receive a tariff demand letter.
• The Bloomberg report also stated that Trump will impose tariffs below 20% on India. Such a scenario will put the nation in a favorable position against economies, such as Vietnam and Bangladesh, that have been slapped with higher tariffs. Given that India is a key exporter of textiles and apparel to the US, along with Vietnam and Bangladesh, the imposition of lower tariffs on India will be a competitive advantage for Indian textile exporters.

Technical Analysis: USD/INR stays above 20-day EMA

The USD/INR pair revisits an over two-week high of around 86.15 on Monday. The near-term outlook of the pair is bullish as the 20-day Exponential Moving Average (EMA) acts as a key support around 85.90

The 14-day Relative Strength Index (RSI) oscillates inside the 40.00-60.00 range, suggesting that the asset lacks momentum on either side.

Looking down, the May 27 low of 85.10 will act as key support for the major. On the upside, the June 24 low at 86.42 will be a critical hurdle for the pair.