USD/INR falls back even as Trump reaffirms hopes of US-Indian trade deal

The Indian Rupee (INR) outperforms its peers on Wednesday on hopes that the US and Indian will reach a trade agreement soon. On Tuesday, US President Trump expressed confidence over closing a deal with India after announcing a trade agreement with Indonesia and added that the pact will also allow US companies to gain access to Indian markets.

The confirmation of a trade deal between the US and India will safeguard India's export-oriented companies from the threat of higher tariffs by the US.

While, it won't be a win-win scenario for all Indian companies as the statement from US President Trump has signaled that New Delhi is allowing concessions on some sectors to the US, allowing its companies to compete in a highly-populated country.

The scenario of US companies entering India will be unfavorable for Indian corporations, given that Washington has the competitive advantage of high capital and technology. This could hit business sentiment, impact equity markets, and reduce the flow of foreign investment from direct and institutional investors.

However, Union Minister Piyush Goyal injected confidence on Tuesday that both nations are working to reach a “win-win” agreement, Financial Express (FE) reported. Goyal added that India’s Chief Trade Negotiator Rajesh Agrawal-led team will hold the next round of trade talks on Wednesday.

Meanwhile, Indian indices recover early losses and turns positive, with Nifty50 reclaiming 25,2500 and Sensex30 rising above 82,700. However, the outlook of Indian pharmaceutical industry has turned gloomy, following Trump's threats to impose tariffs on imports of pharmaceuticals by the end of the month.

On Tuesday, Trump stated that he will start with lower tariffs before moving towards higher ones to allow domestic pharmaceutical manufacturers to increase their capacity. Given that India is a key exporter of pharmaceuticals to the US, tariffs on Indian pharma companies could impact their growth significantly.

Daily digest market movers: Indian Rupee gains despite tariff-driven inflation strengthens US Dollar

• The Indian Rupee recovers early losses and rises against the US Dollar (USD) on Wednesday. The USD/INR pair slides to near 85.85 even as the US Dollar extends its upside after traders pare Federal Reserve (Fed) dovish bets, following signs from the United States (US) Consumer Price Index (CPI) report for June that tariffs announced by President Donald Trump have started feeding inflation.
• The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades firmly near a three-week high around 98.60.
• The CPI report showed on Tuesday that the headline inflation accelerated at an expected pace on a monthly as well as a yearly basis, while core readings missed estimates. However, they came in higher than the May release. The report also notes that prices of products imported by the US, such as household furnishings, recreation, and apparel, rose sharply as importers started passing on the impact of higher tariffs to consumers, which led traders to reassess their expectations towards the Fed’s monetary policy outlook.
• According to the CME FedWatch tool, the probability for the Fed to cut interest rates in the September meeting has reduced to 55.5% from 64.7% seen a week ago.
• Market experts have also warned that the impact of Trump’s tariffs has still not fully passed into prices as US importers loaded inventories before the announcement of reciprocal levies on so-called “Liberation Day” in April. Also, the impact of tariffs announced on 22 countries and trade deals with a few nations is yet to filter through. The lack of clarity on tariff-led inflation will encourage Fed officials to maintain interest rates at their current levels for longer.
• If the recent tariffs threatened for August 1 go into effect, it will take a few months for that additional boost to inflation to be felt in goods prices and will keep the Fed on the sideline unless the labor market takes a sudden turn for the worse," said Ryan Sweet, chief U.S. economist at Oxford Economics, Reuters reported.

Technical Analysis: USD/INR struggles to hold 20-day EMA

USD/INR retreats after revisiting the three-week high of 86.15 on Wednesday. The near-term trend of the pair has become uncertain as it struggles to hold above the 20-day Exponential Moving Average (EMA), which trades around 86.00.

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.