USD/INR loses momentum on Fed rate cut bets, focus on US CPI data
- The Indian Rupee edges higher in Thursday’s early European session.
- The persistent Indian foreign inflows and a fall in crude oil prices support the INR.
- The US June Consumer Price Index (CPI) inflation data will be the highlight on Thursday.
The Indian Rupee (INR) strengthens on the softer US Dollar (USD) on Thursday. Additionally, the sustained inflow of foreign funds into Indian markets and the decline of crude oil prices all contribute to the INR's upside. The upside of the pair remains capped amid the potential rate cuts by the US Federal Reserve (Fed), even though Fed Chair Jerome Powell said the labor market was better balanced and acknowledged progress on cooling inflation without committing to rate cuts.
Nonetheless, the renewed Greenback demand from importers due to high oil price pressures might undermine the local currency as India is the third largest consumer of crude oil in the world, after the United States and China. Later on Thursday, investors will closely monitor the release of the US Consumer Price Index (CPI) inflation data for June. Further progress on inflation could lead to key changes in their policy statement that pave the way for a September rate cut.
Daily Digest Market Movers: Indian Rupee rebounds amid Indian foreign inflows and lower crude oil prices
- The Indian Rupee is expected to trade with a slight bearish bias on weakness in the domestic market and a positive tone in the US Dollar, said Anuj Choudhary, Research Analyst at Sharekhan by BNP Paribas.
- The Fed Chair Jerome Powell responded to questions before the House Financial Services Committee on Wednesday, saying that the Fed will make interest rate decisions based on the data, the incoming data, the evolving outlook, and the balance of risks, and not in consideration of political factors.
- Powell further stated that it would not be appropriate to cut the policy rate until they gain greater confidence in inflation heading sustainably towards the Fed’s 2% target.
- Fed Governor Lisa Cook said on Thursday that US inflation should continue to fall without a significant further rise in the Unemployment Rate, per Reuters.
- The probability of the Fed leaving the policy rate unchanged in September stood at nearly 25% following this event, according to the CME FedWatch Tool.
- The US CPI is projected to show an increase of 3.1% YoY in June, while core inflation is projected to remain steady at 3.4% YoY.
Technical analysis: USD/INR extends consolidation in the near term
The Indian Rupee trades on a positive note on the day. The USD/INR pair maintains its uptrend on the daily chart, with the pair holding above the key 100-day Exponential Moving Average (EMA).
In the near term, further consolidation remains in play as the pair has traded within a familiar trading range since March 21. The neutral momentum is also supported by the 14-day Relative Strength Index (RSI), which hovers around the 50-midline.
Sustained trading above the upper boundary of the trading range at 83.65 will pave the way to the all-time high of 83.75. Further north, the next hurdle is seen at the 84.00 psychological barrier.
On the other hand, a decisive break below the 100-day EMA at 83.36 could draw in enough bearish demand to the 83.00 round mark. The additional downside filter to watch is 82.82, a low of January 12.
US Dollar price in the last 7 days
The table below shows the percentage change of US Dollar (USD) against listed major currencies in the last 7 days. US Dollar was the weakest against the Pound Sterling.
| USD | EUR | GBP | CAD | AUD | JPY | NZD | CHF | |
| USD | -0.42% | -0.89% | -0.10% | -0.75% | 0.03% | 0.17% | -0.20% | |
| EUR | 0.42% | -0.47% | 0.32% | -0.33% | 0.45% | 0.59% | 0.22% | |
| GBP | 0.88% | 0.44% | 0.78% | 0.13% | 0.89% | 1.04% | 0.67% | |
| CAD | 0.09% | -0.30% | -0.77% | -0.64% | 0.10% | 0.26% | -0.12% | |
| AUD | 0.75% | 0.32% | -0.12% | 0.65% | 0.76% | 0.91% | 0.54% | |
| JPY | -0.03% | -0.42% | -0.91% | -0.14% | -0.77% | 0.17% | -0.23% | |
| NZD | -0.17% | -0.59% | -1.05% | -0.28% | -0.92% | -0.15% | -0.38% | |
| CHF | 0.21% | -0.22% | -0.67% | 0.10% | -0.53% | 0.22% | 0.37% |
The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the Euro from the left column and move along the horizontal line to the Japanese Yen, the percentage change displayed in the box will represent EUR (base)/JPY (quote).
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
FXStreet
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.
