FUNDAMENTAL OVERVIEW
USD:
The US dollar weakened across the board on Thursday after Trump cancelled the planned attacks on Iran and announced a deal to be signed in the following days. As a result, Fed rate hike expectations got pared back immediately with the market now pricing in 16 bps of tightening by year-end compared to 24 bps before the deal announcement.
In the short-term, the focus will be on this new development as oil prices fall and inflation concerns ease. On Wednesday, we have the FOMC rate decision where the Fed is expected to keep interest rates unchanged and drop the easing bias. The Fed will also release the latest economic projections and the dot plot.
The market might forgive some hawkish tone from the Fed decision in light of this new development but not if the central bank places more weight on economic strength rather than easing inflation expectations.
Looking ahead, oil prices will likely continue to fall and might reach pre-war levels. The risk then is that the negative supply shock turns into a positive demand shock that boosts economic activity further requiring rate hikes anyway. For now, the markets can celebrate.
INR:
On the INR side, the Rupee rallied strongly on Thursday following Trump’s US-Iran deal announcement and extended the gains as expectations for the end of the war grew.
As noted in previous occasions, the Rupee has been closely correlated with oil prices, so positive developments on the US-Iran front kept giving the INR a boost, while negative ones weighed on it.
Oil prices continue to fall pretty quickly with the deal expected to be signed on Friday and the Strait of Hormuz getting reopened shortly. This should keep supporting the Indian Rupee in the short-term.
The hawkish Fed risk is now also a major driver. Therefore, a more hawkish than expected FOMC on Wednesday could put pressure on the Rupee as the US dollar will likely rally across the board.
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 dropped into the trendline and probed below it on US-Iran deal optimism. The path of least resistance should have now switched to the downside in the short-term as oil prices continue to ease. The first natural target should be the 94.00 handle, so the sellers will look for opportunities on the lower timeframes to keep pushing into new lows.
USDINR TECHNICAL ANALYSIS – 4 HOUR TIMEFRAME
On the 4 hour chart, we can see more clearly selloff into the trendline with the price now pulling back a bit. There’s not much we can add here but as long as the price stays below the trendline, we can expect the sellers to keep pushing into new lows.
USDINR TECHNICAL ANALYSIS – 1 HOUR TIMEFRAME
On the 1 hour chart, we have a minor downward trendline defining the bearish momentum. The sellers will likely step in around the broken major trendline and the minor trendline to keep pushing into new lows, while the buyers will want to see a break above the minor trendline to pile in for a rally into the 96.00 resistance next.
UPCOMING CATALYSTS
On Wednesday, we have the FOMC rate decision. On Thursday, we get the latest US Jobless Claims figures.
