USD/INR retraces as Fed looks set to cut interest rates in September
- The Indian Rupee ticks higher against the US Dollar, outlook remains uncertain.
- US President Trump signals that he could reset relations with India.
- Soft US NFP data has opened the door for a bigger interest rate reduction by the Fed in the policy meeting next week.
The Indian Rupee (INR) edges higher against the US Dollar (USD) at the start of the week. The USD/INR pair drops to near 88.25 after posting a fresh all-time high slightly above 88.50 on Friday. The pair retraced quickly from its all-time high, following likely intervention of the Reserve Bank of India (RBI) to support the Indian Rupee, according to a report from Reuters.
The outlook of the Indian Rupee remains vulnerable as Foreign Institutional Investors (FIIs) continue to pare stake from the Indian stock market due to ongoing trade tensions between the United States (US) and India. In August, Washington raised tariffs on imports from New Delhi to 50% for buying Oil from Russia, which US President Donald Trump called a scenario that is funding Moscow for continuing the war in Ukraine.
However, on Friday, the comments from US President Trump signaled that he could mend fences with India. Trump said while responding to reporters that India and the US have a special relationship and there’s nothing to worry about the ties between the nations. These comments from Trump came after reporters asked about whether he wants to reset relations with India.
On Friday, FIIs sold Indian equities worth Rs. 1,304.91 crores. In September, overseas investors have pared stake worth Rs. 5,666.901 crores. Foreign investors have extended their sell-off for the third month in a row. In July and August, FIIs sold equities worth Rs. 94,569.6 crores cumulatively.
This week, investors will focus on key US CPI data for August
- A slight downtick in the USD/INR pair is also driven by uncertainty surrounding the US Dollar’s outlook, following the opening of hopes of a larger-than-usual interest rate cut by the Federal Reserve (Fed) in its monetary policy meeting next week.
- During the press time, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, ticks up to near 97.80 after a sharp decline on Friday.
- According to the CME FedWatch tool, traders see a 10% chance that the Fed will reduce interest rates by 50 basis points (bps) to 3.75%-4.50% in the September policy meeting.
- Fed dovish bets for a bumper rate cut have stemmed from deteriorating labor market conditions in the wake of the tariff policy imposed by US President Trump.
- August’s Nonfarm Payrolls (NFP) report showed on Friday that the US economy added 22K fresh workers, significantly lower than expectations of 75K and the prior reading of 79K. This was the slowest growth in the overall labor force seen since January 2021. The Unemployment Rate accelerated to 4.3%, as expected, from the prior reading of 4.2%.
- Fed dovish expectations also escalated significantly in early August after July’s NFP report showed a significant revision in May and June’s employment figures on the downside.
- Lately, Federal Open Market Committee (FOMC) members, including Chair Jerome Powell, have also argued in favor of reducing interest rates amid growing downside labor market risks.
- This week, the major trigger for the US Dollar will be the Consumer Price Index (CPI) data for August, which is scheduled for Thursday.
Technical Analysis: USD/INR remains upbeat as 20-day EMA slopes higher
The USD/INR pair corrects to near 88.25 from its all-time high posted on Friday. The near-term trend of the pair remains bullish as it holds above the 20-day Exponential Moving Average (EMA), which trades near 87.80.
The 14-day Relative Strength Index (RSI) trades calmly above 60.00, suggesting that a fresh bullish momentum has come into effect.
Looking down, the 20-day will act as key support for the major. On the upside, the round figure of 89.00 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.
Author
Sagar Dua
FXStreet
Sagar Dua is associated with the financial markets from his college days. Along with pursuing post-graduation in Commerce in 2014, he started his markets training with chart analysis.
