Indian Rupee maintains the bearish bias amid prolonged US-Iran stalemate, hawkish Fed risk

FUNDAMENTAL OVERVIEW

USD:

The US dollar rallied strongly across the board on Friday as the very hot NFP gain with higher revisions for the prior months served as a wake-up call that the Fed could be forced to raise interest rates. The job gains have been much higher than the estimated breakeven rate lately. The unemployment rate fell to an unrounded 4.29% vs 4.33% in the prior month.

Following the NFP report, the market fully priced in a rate hike by year-end with the total tightening standing at 26 bps right now. We can now expect the Fed to drop the easing bias at the upcoming meeting, but the focus will be mostly on the dot plot and forward guidance. Even though a rate hike is now fully priced in, if the Fed endorses the market pricing, it will effectively confirm that the bias has now shifted to tightening and might trigger another rally in the greenback.

This week, the most important event is the US CPI report due tomorrow (barring a surprising breakthrough in US-Iran negotiations). The question for markets is now when and how many rate hikes the Fed might deliver by year-end. Upside surprises would be seen as more hawkish and will likely give the US dollar a boost. Conversely, lower than expected figures should alleviate some of the most hawkish fears and might trigger a pullback in the short-term.

INR:

On the INR side, the Rupee got a slight boost from the RBI decision as traders interpreted it as more hawkish with RBI Governor Malhotra warning that if inflation were to become generalised, the bank would need to raise interest rates.

The gains were short-lived though as the very strong US NFP number boosted the US dollar across the board. The escalation between Israel and Iran has also weighed on the Rupee as oil prices jumped, but the quick de-escalation helped avoiding a breakdown.

In the short-term, the Rupee has been closely correlated with oil prices, so positive developments on the US-Iran front should keep giving the INR a boost. Conversely, extended stalemate or further escalations will likely keep weighing on the currency and push it into new record lows.

The hawkish Fed risk is now also a major driver. Therefore, strong US data or more hawkish than expected FOMC are going to put further pressure on the Rupee as the US dollar will likely extend gains.

In the big picture, the Indian Rupee remains on a bearish structural trend against the US dollar, so the dip-buyers will likely look for opportunities around strong technical levels to keep pushing the USD/INR pair into new highs.

USDINR TECHNICAL ANALYSIS – DAILY TIMEFRAME

On the daily chart, we can see that USDINR is consolidating just below the key 96.00 resistance. The sellers will likely continue to step in around the resistance with a defined risk above it to keep targeting new lows. The buyers, on the other hand, will want to see the price breaking higher to pile in for a rally into new record highs.

USDINR TECHNICAL ANALYSIS – 4 HOUR TIMEFRAME

On the 4 hour chart, we can see more clearly the rangebound price action. We got a selloff on Friday on a slightly more hawkish RBI decision but the losses were eventually erased following the very strong NFP number and the Israel-Iran escalation.

From a risk management perspective, the buyers will have a better risk to reward setup around the major trendline, but we are unlikely to see such a pullback without an RBI intervention, a soft US CPI or a surprising breakthrough in US-Iran stalemate.

USDINR TECHNICAL ANALYSIS – 1 HOUR TIMEFRAME

On the 1 hour chart, there’s not much we can add here as the sellers will continue to step in around the resistance to keep pushing into the major trendline, while the buyers will look for a break to pile in for a rally into new record highs.

UPCOMING CATALYSTS

Tomorrow, we have the US CPI report. On Thursday, we get the latest US Jobless Claims figures and the US PPI report. On Friday, we conclude the week with the Indian CPI report and the University of Michigan consumer sentiment survey.