Forex chart of the week: USD/INR hits ATH ahead of RBI decision

The USD to Indian rupee (USD/INR) will be the forex chart to watch this week as the market watches the actions of the Reserve Bank of India (RBI) and continue reflecting on the next actions by the Federal Reserve. The pair was trading at 83.77 on Friday, a few points below the all-time high of 83.

Reserve Bank of India preview

The RBI and the Reserve Bank of Australia (RBA) will be the major central banks to make interest rate decisions this week. The RBA will come first on Tuesday (read our RBA preview) followed by the RBI on Thursday.

RBI’s decision comes at an important time for the Indian economy. The Indian rupee has crashed to a record low against the US dollar. Precisely, it has dropped by over 16% from its highest point in 2021. It has also become one of the worst-performing currencies in the emerging markets this year. 

At the same time, Indian stocks are still firing on all cylinders, with the Nifty 50 index soaring to its highest point on record. Some of the top-performing stocks in the index are the likes of Adani Enterprises and Tata Motors. 

The upcoming RBI interest rate decision will be important because it will come out at a time when central banks are starting to rethink their higher-for-longer interest rates posture. 

In Europe, the European Central Bank (ECB), Bank of England (BoE), Swiss National Bank (SNB), and the Riksbank have already started cutting interest rates. The BoE was the most recent bank to slash rates last week.

The RBI, on the other hand, has maintained a modestly hawkish tone in the past few months as inflation has remained at an elevated level. The recent economic numbers showed that the country’s inflation rose from 4.80% in May to 5.08% in June, higher than the median estimate of 4.80%. 

India’s inflation has constantly remained above 4.50% in the past few months. And analysts expect that food inflation will continue rising in the next few months. Also, the RBI has maintained that it was not in a hurry to start cutting rates. 

In a recent poll by Reuters, most economists expect the RBI will leave rates intact in this meeting and then start cutting in the fourth quarter. 

Instead of interest rate cuts, the RBI has embraced interventions in the forex market. It did that by selling dollars through state-run banks as dollar bids from large US banks continued to pressure the rupee.

Federal Reserve interest rate cut odds

The USD/INR exchange rate also reacted to last week’s Federal Reserve interest rate decision and the weak jobs report.

On Tuesday, a report by the Bureau of Labor Statistics (BLS) showed that the country’s job vacancies dropped to a two-year low in June. Another report by ADP revealed that the number of private sector payrolls dropped in July. 

Most importantly, the official non-farm payrolls (NFP) data dropped from over 170k in June to 117k in July. That was the smallest level in months.

At the same time, the country’s unemployment rate rose to 4.3% in July, continuing a trend that has been going on for months. Therefore, analysts expect that the situation will continue worsening unless the Fed acts.

In its July interest rate decision, the bank decided to leave interest rates unchanged between 5.25% and 5.50%. In a change of tune, Jerome Powell noted that the door was now open for the Fed to start cutting rates in its September meeting. 

Therefore, a combination of a worsening labor market and slowing inflation, mean that the Fed will be pressured to start slashing rates in the coming months. 

Looking ahead, the USD/INR exchange rate will likely react to more interventions by the RBI this week. It will also react to the upcoming HSBC India services PMI report and the country’s deposit growth numbers.

The other key economic numbers to watch will be the US jobless claims report on Thursday and the ISM non-manufacturing PMI data.

USD/INR technical analysis

USD/INR chart by TradingView

The daily chart shows that the USD/INR exchange rate has been in a strong bull run in the past few months. It has constantly above the 50-day moving average and the Ichimoku cloud indicator. 

On the positive side for the Indian rupee, the pair has formed a rising wedge chart pattern, a popular bearish sign. This pattern, which is shown in green, is characterised by two converging trendlines. 

Therefore, the pair will likely remain in this range in the near term and then it will retreat in the next few weeks. If this happens, the USD/INR pair could drop to the next psychological point at 83, which is about 1% below the current level.