- The Indian Rupee trades lower against the US Dollar as the latter gains on risk-off market mood.
- Trump announces 30% tariffs on imports from the EU and Mexico.
- Investors await India-US CPI data for June.
The Indian Rupee (INR) declines against the US Dollar (USD) at the start of the week, sends the USD/INR pair higher to near 86.15. The pair strengthens as the Indian currency underperforms, following a surprise decline in the Wholesale Price Index (WPI) Inflation data for June, a key indicator that measures inflation at producer level.
The report showed that the WPI inflation surpringly declined by 0.13% on year. Economists expected the WPI Inflation to have grown at a faster pace of 0.52%, compared to a 0.39% growth seen in May. According to the report, lower food and energy prices contributed significantly to an decline in WPI inflation.
Meanwhile, investors brace for more volatility in the Indian Rupee as the Consumer Price Index (CPI) data for June is scheduled to be published at 10:30 GMT. Market participants will closely monitor the consumer inflation data as it will infuence amrket expectations for the Reserve Bank of India’s (RBI) monetary policy outlook.
Year-on-year India’s CPI is expected to have risen moderately by 2.5% on year against 2.82% growth seen in May. This would be the fifth straight month when the headline CPI will remain lower than the RBI’s target of 3.7% for the current financial year, which it set in June’s policy meeting after front-loading interest rate cuts.
On the global front, uncertainty surrounding the trade deal between the US and India has kept the Indian Rupee on the back foot. US President Trump has stated a couple of times that Washington is close to securing a trade pact with India, but has not announced it officially.
However, a report from Bloomberg over the weekend has boosted investors’ confidence that the US and India are close to striking a trade agreement as it stated that the South-Asian nation doesn’t expect to receive a tariff demand letter.
The Bloomberg report also stated that Trump will impose tariffs below 20% on India. Such a scenario will put the nation in a favorable position against economies, such as Vietnam, and Bangladesh that have been slapped higher tariffs. Given that India is a key exporter of textiles and apparels to the US along with Vietnam and Bangladesh, the imposition of lower tariffs on India will be a competitive advantage for Indian textile exporters.
Daily digest market movers: Indian Rupee underperforms, India-US CPI in focus
- The Indian Rupee trades lower against the US Dollar as the latter extends its upside amid increased demand for safe-haven assets, following the announcement of higher import duties by United States (US) President Donald Trump on key trading partners, the European Union (EU) and Mexico.
- At the time of writing, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades firmly near 98.00, the highest level seen in over two weeks.
- Over the weekend, US President Trump rekindled global trade jitters after sending letters to the European Union (EU) and Mexico, dictating 30% tariffs that will be separate from sectoral levies and warning that any retaliatory measures will be met by further increases in import duties.
- The announcement has led to a sharp decline in riskier assets. US equity futures have extended Friday’s losses, and risk-perceived currencies, such as the Indian Rupee, are underperforming, demonstrating a risk-aversion market mood.
- Last week, US President Trump also announced 25% tariffs on Japan and 35% on Canada, along with 50% on imports of copper.
- In the US, investors will also focus on the CPI data for June, which will be released on Tuesday. The CPI report is expected to show that price pressures grew at a faster pace, a scenario that will discourage Federal Reserve (Fed) officials from cutting interest rates in the September meeting. According to the CME FedWatch tool, there is a 62.8% chance that the Fed will reduce interest rates in September.
Technical Analysis: USD/INR strives to hold above 86.00
The USD/INR pair revisits an over two-week high of around 86.15 on Monday. The near-term outlook of the pair is bullish as the 20-day Exponential Moving Average (EMA) acts as a key support around 85.90
The 14-day Relative Strength Index (RSI) oscillates inside the 40.00-60.00 range, suggesting that the asset lacks momentum on either side.
Looking down, the May 27 low of 85.10 will act as key support for the major. On the upside, the June 24 low at 86.42 will be a critical hurdle for the pair.
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it.
Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
