At a Glance
- The Indian Rupee (INR) weakened against the US Dollar (USD), with USD/INR approaching 88.90.
- Receding Federal Reserve dovish bets and improved US-China trade relations are bolstering the USD.
- The CME FedWatch tool indicates a lower probability of a December rate cut by the Fed.
- Signs of improving US-China trade relations, including tariff adjustments and purchase agreements, are supporting the USD.
- Renewed selling by overseas investors in the Indian stock market is weighing on the INR.
- Technical indicators suggest a bullish near-term trend for USD/INR, with the pair holding above the 20-day EMA.
USD/INR Faces Pressure Amid Shifting Fed Expectations and Trade Developments
The Indian Rupee (INR) experienced a decline against the US Dollar (USD) on Friday, following a flat opening. The USD/INR pair edged higher, nearing the 88.90 level. This movement is attributed to a firmer US Dollar, influenced by diminishing expectations of a dovish stance from the Federal Reserve (Fed) and positive developments in US-China trade relations.
The US Dollar Index (DXY), which measures the dollar’s performance against a basket of major currencies, maintained its gains, trading near a near three-month high of approximately 99.70 achieved on Thursday.
Federal Reserve Interest Rate Outlook
Market sentiment regarding the Federal Reserve’s monetary policy has shifted. The CME FedWatch tool shows a decrease in the probability of a 25 basis points (bps) interest rate cut to 3.50%-3.75% during the December meeting, falling to 72.8% from 91.1% a week prior. This cooling of dovish bets follows the Fed’s monetary policy announcement on Wednesday, where Chairman Jerome Powell indicated that a December rate cut was not a certainty after a previous 25 bps reduction to 3.75%-4.00%.
Investors are now anticipating further insights into the interest rate trajectory from speeches by Federal Open Market Committee (FOMC) members Raphael Bostic and Beth Hammack during the North American session. The absence of economic data releases due to the ongoing federal shutdown also means market participants will be closely monitoring commentary for clues on the labor market’s current standing.
Market Movers: FII Selling Impacts Indian Rupee
Developments in US-China trade relations continue to provide support to the USD/INR pair. US President Donald Trump described his meeting with Chinese leader Xi Jinping as amazing, rating it exceptionally high. He indicated a reduction in tariffs on China to 47% from 57%, citing cooperation on fentanyl issues, no restrictions on rare earth exports, and China’s intent to resume soybean purchases.
In response, China’s Commerce Ministry announced a suspension of export control measures implemented on October 9 for one year and an expansion of agricultural trade with the US. Further signaling progress, US Treasury Secretary Scott Bessent suggested that Washington and Beijing were close to signing a trade deal, potentially as soon as the following week.
💡 In Asian markets, the Indian Rupee faced downward pressure due to renewed selling of Indian equities by overseas investors. While Foreign Institutional Investors (FIIs) showed some optimism earlier in the week with net purchases, this sentiment has waned, as FIIs have reduced their holdings significantly over the past two days.
Moving forward, the trajectory of US-India trade talks will be a crucial factor influencing the Indian Rupee. Although negotiators from both nations have expressed confidence in reaching an agreement, no official announcement has been made yet.
📊 Indian equity markets are experiencing some volatility, partly due to the ongoing Q2 earnings season. The earnings reports from IT companies, in particular, have been tepid, reflecting uncertainties surrounding tariffs in the US economy.
Technical Analysis: USD/INR Stabilizes Above Key Moving Average
The USD/INR pair is showing signs of stabilization, trading above the 20-day Exponential Moving Average (EMA), which is currently positioned around 88.49. This suggests a potential shift towards a bullish near-term trend for the currency pair.
The 14-day Relative Strength Index (RSI) is attempting to break above the 60.00 level. A sustained move above this threshold could signal the emergence of fresh bullish momentum.
Key support for the USD/INR pair is identified at the August 21 low of 87.07. On the upside, the all-time high of 89.12 presents a significant resistance level.
Understanding Fed Interest Rate Decisions
The Federal Reserve (Fed) convenes eight times a year to deliberate on monetary policy and decide on interest rates. Its dual mandate involves maintaining inflation at 2% and ensuring full employment. The primary tool used in achieving these objectives is the setting of interest rates, influencing lending between banks and from banks to the Fed.
An increase in interest rates typically leads to a strengthening of the US Dollar (USD) as it attracts more foreign capital. Conversely, a rate cut tends to weaken the USD as capital flows to markets offering higher returns. When rates remain unchanged, the market scrutinizes the tone of the Federal Open Market Committee (FOMC) statement for indications of future rate movements, differentiating between a hawkish outlook (anticipating higher future rates) and a dovish outlook (anticipating lower future rates).
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 Indian Rupee from the left column and move along the horizontal line to the US Dollar, the percentage change displayed in the box will represent INR (base)/USD (quote).
Final Thoughts
The Indian Rupee’s performance against the US Dollar is currently influenced by evolving Federal Reserve policy expectations and developing US-China trade discussions. Overseas investor activity in the Indian stock market also plays a significant role in the INR’s valuation.