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USD/INR extends its upside as Fed rate decision looms

  • The Indian Rupee softens to near an-all-time low in Wednesday’s early European session. 
  • Outflows from local equities and the widening of India’s November merchandise trade deficit could weigh on the INR. 
  • The Fed interest rate decision will take center stage on Wednesday. 

The Indian Rupee (INR) trades on a weaker note to near a fresh record low on Wednesday. The local currency remains on the defensive amid persistent demand for US Dollar (USD), foreign fund outflows and a muted trend in domestic equities. Additionally, the widening of India’s merchandise trade deficit in November further undermines the INR. However, the routine foreign exchange intervention by the Reserve Bank of India (RBI) to sell the USD via state-owned banks could prevent the INR from significantly depreciating.

Looking ahead, the US Federal Reserve (Fed) interest rate decision will be in the spotlight on Wednesday. The US Fed is expected to deliver a quarter of a percentage point cut at the December meeting. Traders will closely monitor the Fed Chair Jerome Powell’s Press Conference and the Summary of Economic Projections, or ‘dot plot.’ Any hawkish remarks from the Fed officials might lift the Greenback and contribute to the INR’s downside. 

Indian Rupee declines ahead of Fed rate decision

  • "While weak Asian cues weighed on market sentiment, the record high trade deficit in November pushed the rupee to a new low, which caused investors to run for cover, triggering panic selling in domestic equities," noted Prashanth Tapse, Senior VP (Research), Mehta Equities Ltd.
  • India's merchandise trade deficit widened to a record high of $37.8 billion in November, compared to $27.1 billion in October. Meanwhile, Exports fell by 4.9% YoY to $32.1 billion, while Imports rose 27% YoY to $69.95 billion during the month under review.
  • The US Retail Sales climbed by 0.7% MoM in November versus a 0.5% increase (revised from 0.4%) prior, according to the US Census Bureau on Tuesday. This figure came in stronger than the 0.5% increase expected. 
  • The US Industrial Production declined by 0.1% MoM in November, compared to a fall of 0.4% (revised from -0.3%) in October, below the market consensus of the 0.3% expansion.
  • The markets are now pricing in a nearly 97.1% chance of a 25 basis points (bps) cut at the Fed's December meeting, compared with about a 78% chance a week ago, according to the CME FedWatch tool. 

USD/INR keeps the bullish vibe in the longer term

The Indian Rupee edges lower on the day. The strong bullish outlook of the USD/INR pair remains in play, characterised by the price holding above the key 100-day Exponential Moving Average (EMA) on the daily timeframe. The upward momentum is supported by the 14-day Relative Strength Index (RSI), which is located above the midline near 68.15, suggesting that the further upside looks favourable. 

The first upside barrier for USD/INR emerges near the ascending trend channel and the psychological level of 85.00. Sustained trading above this level could draw in buyers and push the pair to 85.50.

On the flip side, the lower boundary of the trend channel of 84.80 acts as an initial support level for the pair. Bearish candlesticks that could lead to a potential retest of the low of November 25 at 84.22. A breach of the mentioned level could expose 84.15, the 100-day EMA.

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.

Author

Lallalit Srijandorn

Lallalit Srijandorn is a Parisian at heart. She has lived in France since 2019 and now becomes a digital entrepreneur based in Paris and Bangkok.

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