USD/INR drifts lower ahead of US PCE data

• Indian Rupee edges higher amid the USD weakness.
• Upbeat Indian growth prospects and substantial foreign investor equity inflows might cap the INR’s downside.
• The release of the US Core Personal Consumption Expenditure Price Index (Core PCE) will be the highlight on Friday.

Indian Rupee (INR) trades on the stronger note amid the US Dollar (USD) softness. The weaker-than-expected US GDP growth numbers exert some selling pressure on the Greenback and create a headwind for USD/INR. Furthermore, India's upbeat growth prospects and strong equity inflows from foreign investors might boost the INR in the near term.

According to the International Monetary Fund (IMF), India is estimated to contribute more than 16% of global growth due to economic reforms in key sectors such as infrastructure and digitalization, which have propelled India to be a "star performer" among countries. Additionally, the IMF stated in its annual Article IV consultation report released on Monday that the Indian economy is supported by prudent macroeconomic policies and is on course to become one of the world's major economies.

Market players will closely watch the US Core Personal Consumption Expenditure Price Index (Core PCE) for November. The Fed’s preferred inflation gauge is estimated to rise 0.2% MoM and 3.3% YoY. This figure could trigger volatility in the market ahead of the holiday season.

Daily Digest Market Movers: Indian Rupee is undermined by elevated inflation and global factors

• The RBI monthly bulletin highlighted that if headline retail inflation is not brought down to the medium-term target of 4% and maintained there, it could underscore the potential impact on growth.
• India’s foreign exchange reserves were $606.9 billion on December 8, 2023, the fourth largest among major foreign exchange reserve-holding countries, increased by $28.4 billion during 2023–24.
• The RBI sold $310 million in the spot foreign currency market in October, according to the monthly Bulletin.
• US Gross Domestic Product (GDP) for the third quarter grew 4.9%, weaker than the market expectation of 5.2% expansion.
• The US Initial Jobless Claims rose 205,000 for the week ending December 16 from the previous week of 202K, below the consensus of 215,000.
• The Philadelphia Fed Manufacturing Index came in at -10.5 in December versus -5.9 prior.
• The Fed Funds futures are pricing in 82% odds of a rate cut at the March meeting, according to the CME FedWatch Tool.

Technical Analysis: Indian Rupee sticks to the longer-term range theme

Indian Rupee trades firmer on the day. The USD/INR pair has traded within the trading range of 82.80–83.40 since September. According to the daily chart, further upside in the shorter term looks favorable as the pair holds above the key 100-day Exponential Moving Average (EMA). Nonetheless, an  attempt to break below the key EMA cannot be ruled out as the 14-day Relative Strength Index (RSI) remains below the 50.0 midpoint.

The first upside barrier of USD/INR will emerge at the upper boundary of the trading range at 83.40. A breakout above 83.40 will see a rally to the year-to-date (YTD) high of 83.47, followed by the 84.00 psychological mark. On the flip side, the critical support level is located at 83.00 round figure. The additional downside filter to watch is 82.80, portraying the confluence of the lower limit of the trading range and a low of September 12. Further south, the next contention level is seen near a low of August 11 at 82.60.