The GBP/INR Rate in the Week Ahead: Bearish Reversal Pattern Forms on Charts
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- Pound-to-Rupee rate slides as Brexit weakness returns.
- Bearish head-and-shoulder pattern forming at recent highs.
- GBP eyes Brexit votes in parliament, inflation data up for INR.
The Pound was trading at 91.06 Monday after falling over 2.8% in the previous week, although a bearish technical formation on the charts means the exchange rate could easily fall even further during the days ahead.
Sterling fell last week due to a lack of progress in Brexit negotiations with the EU, which means it's unlikely Prime Minister Theresa May will win enough votes to get her exit deal approved by Parliament on Tuesday. This could mean a delay to the process is likely, although the uncertainty has weighed on Sterling.
The Rupee, meanwhile, rose last week after investors returned to the Indian bond market, pushing up demand for the currency. Indian government bonds are often popular with carry traders due to their relatively high coupon returns.
Above: Pound-to-Rupee rate shown at daily intervals.
From a technical perspective, the outlook for GBP/INR rate has turned bearish as the pair has now seen seven down-days in a row and successfully broken as well as closed below the 50 and 200-day moving averages (MA).
These are very bearish signs that suggest more declines are to come. If the pair successfully breaks below the February lows the downward slide could gain momentum, potentially leading the market all the way down a target at 90.00.
A break below 90.000 would open the door for a continuation down to the 87.85 area, which is the neckline of a large head-and-shoulders reversal pattern. The head-and-shoulders pattern that has appeared on the charts is a bearish one.
A break below the neckline of the head-and-shoulders pattern would create scope for a much deeper decline beneath the 85 level. The depth of the entire fall would likely be equivalent to the height of the pattern extrapolated lower.
Not all of the signals currently given off by the charts are bearish, as the recent crossing of the 50-day moving average over the 200-day average is actually a very bullish indicator. This is what's known as a 'golden cross’, which would normally suggest there is some upside in the cards, although in this instance it's offset by the break below the two moving averages.
Above: Pound-to-Rupee rate shown at weekly intervals.
The Indian Rupee: Economic Data in Focus
The main fundamental events for India in the week ahead are manufacturing, inflation and industrial production figures, which are due out on Tuesday at 12.00 London time.
Industrial production growth is expected to have slowed to 2% in February, from 2.4% previously. Inflation is forecast to have risen by 2.43% last month, up from 2.05% in January. There's no consensus for January manufacturing production, although output rose by 2.7% during the year to December 2018.
Inflation is the most important release this week because it's price pressures that dictate central bank interest rate policy. Higher inflation normally leads to higher interest rates and currency strength, via the carry trade mentioned above.
Other data includes the current account in Q4, which is out at 12.00 GMT on Wednesday and revealed a deficit of -$19.1bn in the previous month.
Wholesale price inflation is also out at 06.30 on Wednesday and is expected to come in at 2.88% for the month of February.
The price of oil is another key fundamental driver of the Rupee due to India’s reliance on imports for its fuel needs. When oil prices rise it weighs heavily on the Rupee and vice versa. The price of oil has traded between $54 and $58 per barrel thus far in March.
“The price action appears to have reinforced the importance of the range with $58 on the top side. The exemptions to the Iranian oil embargo are to end next month. On the other hand, some Libyan production is expected to return. Technically, we are monitoring a potential head and shoulder bottom than projects toward $67,” says Marc Chandler of Marctomarket.com.
A further bullish factor for oil, and a bearish one for the Rupee, is that the oil market is about to enter a period of “supply deficit” according to research from Barclays. This is likely to last until the end of 2019 when the market will return to equilibrium. That being the case, the price of oil is likely to remain elevated.
Finally, another factor likely to keep oil prices buoyant is that China’s oil demand has remained strong even in the face of a weakening economy.
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The Pound this Week: Trio of Brexit Votes to Spark Volatility
The main event for Sterling in the coming week is Parliament’s meaningful vote on Brexit on Tuesday.
With no further concessions on the Irish backstop likely from the EU, and talks being described as being close to breaking down, Theresa May is now unlikely to present the changes required to win and the most probable scenario is that Parliament then moves to vote on whether or not to exit the union without a deal, on Wednesday.
Assuming it does not vote for this outcome - parliamentary arithmetic suggests this is highly unlikely - the next most probable outcome is that Parliament votes on Thursday to decide to request a delay of Article 50 and the whole Brexit process from the EU.
That there will be a delay is currently the consensus expectation. How this will affect Sterling is open to interpretation.
“If lawmakers choose to delay Brexit, a modest rise is attainable for the Pound, while a surprise backing of May’s deal could send the Pound surging above $1.35. But In the unlikely event that a no-deal wins support, sterling could crash below $1.27,” says Raffi Boyadijian, an economist at broker XM.com.
The Brexit deal faces a heavy defeat in parliament on Tuesday because she has so far secured no major changes from the European Union, the leaders of two major eurosceptic factions in parliament said on Sunday.
Nigel Dodds, the deputy leader of the Democratic Unionist Party (DUP) which props up May’s minority government, and Steve Baker, a leading figure in the large eurosceptic faction of her Conservative party, warned “the political situation is grim”.
“An unchanged withdrawal agreement will be defeated firmly by a sizeable proportion of Conservatives and the DUP if it is again presented to the Commons,” they wrote in the Sunday Telegraph.
In further, developments a Sunday Times report says May’s team have been warned by senior Brexiteers that she would get her deal passed only if she offered to resign by June so a new prime minister could lead the second phase of negotiations.
"We think Sterling faces a more difficult road," says James Rossiter, a foreign exchange strategist with TD Securities. "A lot of good news is already in the price and that investors may have gotten a little ahead of themselves in hoping for further positive developments. With the UK's data and event calendar relatively light until the 12th, we think Sterling may start to feel the effects of gravity once again."
The other main release is UK GDP which is forecast to show a 0.2% rise in January after a -0.4% fall in December when it is released at 9.30 GMT on Tuesday.
GDP is forecast to have risen 1.2% from a year ago, up from 1.0% previously. A higher-than-expected rise would support the Pound and vice versa for a lower-than-forecast result.
The trade balance in January is released at the same time as GDP and is forecast to show a -12.2bn deficit compared to -12.1bn previously.
Also released at the same time is manufacturing production and this is forecast to show a 0.0% rise in January month-on-month compared to the -0.7% previously.
Industrial production in January is released at the same time and estimated to have fallen by an even steeper -1.4% from -0.9% previously.
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