The Indian Rupee (INR) weakened further on Friday, following its depreciation to an all-time low of 85.12 against the US Dollar (USD) in the previous session. This decline is primarily driven by a hawkish stance from the US Federal Reserve (Fed), which has supported the USD and put pressure on emerging market currencies like the INR. However, falling crude oil prices might help limit the INR’s losses, as India is the world’s third-largest oil consumer, and the Reserve Bank of India (RBI) may intervene to curb excessive volatility.
Key Drivers Behind INR Weakness:
Fed’s Hawkish Rate Cut: The Fed’s hawkish approach to rate cuts, signaling a slower pace of reductions, has strengthened the USD across the board. As the Fed emphasizes caution on further cuts due to persistent inflation concerns, the USD has gained momentum, which has weighed on emerging market currencies like the INR.
Crude Oil Price Decline: While the INR faces headwinds from a stronger USD, the drop in crude oil prices could provide some support. India imports a significant amount of its oil, and lower oil prices help reduce the country’s import bill, easing pressure on the INR.
Indian Forex Reserves Decline: India’s foreign exchange reserves have been decreasing in recent weeks, hitting a multi-month low. Reserves fell from an all-time high of $704.89 billion in September to $654.857 billion last week. This decline, combined with a continued outflow of foreign investments (nearly $500 million worth of Indian stocks sold on Thursday), has contributed to INR weakness.
US Economic Data: The US economy continues to show strength, with the latest GDP data reporting a 3.1% annualized growth rate for the third quarter, above the expected 2.8%. Additionally, US Initial Jobless Claims dropped to 220,000 for the week ending December 14, indicating continued resilience in the US labor market, which reinforces the bullish outlook for the USD.
USD/INR Technical Outlook:
Despite the short-term weakness in the INR, the longer-term outlook for USD/INR remains constructive. The pair is holding above the 100-day Exponential Moving Average (EMA), and the 14-day Relative Strength Index (RSI) is near 70.95, indicating that the pair is in overbought territory. This suggests a potential period of consolidation before any further significant appreciation in the USD/INR pair.
Immediate Resistance: The key resistance level for USD/INR is at 85.20, the upper boundary of the current ascending trend channel. A breakout above this level could trigger a move toward the 85.50 level.
Immediate Support: On the downside, the first support target is at 84.86, the lower boundary of the trend channel. A breach below this level could pave the way for a deeper pullback to the 100-day EMA near 84.16.
Key Events to Watch:
US Data: Traders will focus on the US Core Personal Consumption Expenditures (PCE) Price Index and the Michigan Consumer Sentiment Index, both due later on Friday. Any surprises in these data points could further influence the USD and impact INR price action.
Indian Data: The market will also keep an eye on any domestic data releases or RBI interventions that could affect the INR’s trajectory.
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