The Pound-to-Rupee Rate: Bearish Head and Shoulders Pattern Suggest Losses are Ahead

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- GBP/INR rate outlook increasingly bearish, charts show

- After a head & shoulders pattern forms at the recent high 

- GBP eyes Brexit news, INR looks to election and oil price

The Pound-to-Rupee rate was trading around 91.17 on Monday after rising more than half a percent in the previous week, although the outlook for the pair has turned bearish in recent days after a head-and-shoulders reversal pattern formed close to the recent highs on the charts. 

Sterling fell at the start of last week after it the government requested from Brussels only a very short delay to the Brexit process.

However, it later recovered some of its loss after the EU left the door open to a much longer extension of the Article 50 negotiating window, and potentially an indefinite one if Prime Minister Theresa May fails again to get the EU Withdrawal Agreement through parliament.

Pundits are still suggesting she will struggle to win enough votes for her deal to be approved next week so there is at least one fundamental reason for why the Pound could rise during the week ahead as a third failure of the Withdrawal Bill to clear parliament might see the market fixate on the odds of Brexit being abandoned by the government or prevented through a second referendum.

From a technical perspective, the outlook for the exchange rate is bearish. The pair has formed a large head and shoulders (H&S) reversal pattern composed of a peak high, which forms the head, and two slightly lower peaks either side that are the shoulders of the pattern.

A break below the neckline at the base of the pattern, which is located at 88.00, would provide confirmation that a deeper decline down toward the 80.00 threshold is in the cards. That target is equivalent to the height of the pattern extrapolated lower.

Above: Pound-to-Rupee rate shown at weekly intervals.

The exchange rate is currently being supported by the 200-week moving-average located around 90.90. The market will have to break clearly below this large obstacle before more downside can be expected. 

The pair failed to sustain a break below 90.90 last week and, while in the process of reversing higher, it formed the bearish head and shoulders pattern now present on the charts. The market now needs to break beneath the hammer’s low at 89.60 to confirm more downside to the 88.00 neckline.

Any break below the neckline at 88.0, on a daily closing basis, would open the door for deeper declines. The descending channel that can be seen on the daily chart is also bearish, although again a clear break below the 89.60 lows is necessary for confirmation of a more protracted fall. 

Above: Pound-to-Rupee rate shown at daily intervals.

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The Indian Rupee: What to Watch

The most important release for the Indian Rupee in the week ahead is the current account balance for the final quarter of 2018. The current account defict was -$19.1 bn in the third-quarter of 2019. 

There is no consensus estimate yet available for the current account balance although the Brent oil price is around $13 lower than it was at the end of the third quarter and the trade balance has duly fallen since that time. The trade balance is a key component of the current account balance. 

Current accounts measure changes in the amount of money flowing into and out of an economy as well as movements in borrowing from the rest of the world.

Currency markets care about the data as it paints a telling picture of international demand for a currency and provides insight into the extent to which a nation is exposed to the changing sentiments of international investors.

With foreign direct investment and portfolio securites put to one side, the other key component of the current account is the trade in goods and service balance. Trade balance data measures the difference in value between a nation's imports and its exports.

Currency markets care about trade balances because the data provides insight into supply and demand of a currency in the "real economy", while also giving a steer on the likely pace of GDP growth in a given period.

Above: Indian current account balance. Source: Tradingeconomics.

Recent analysis from Goldman Sachs suggests that oil prices are more likely to rise in the future as global demand outstrips supply.

That could mean both the trade and current account balances widen because India has to import substantially all of the oil it consumes and when prices rise, more money leaves the country.

The other key background event for the Rupee in the week ahead is the ebb and flow of expectations relating to the general election due to be held in April and May, with results announced on May 23. 

Consensus is that the governing Bharatiya Janata Party (BJP) will win that a lack of an absolute majority will produce a coalition government. There is a risk the Rupee will fall going into the election because of uncertainty about the likely outcome, but weakness shouldn't last for long if the outcome is as polls suggest.

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The Pound: What to Watch

The main event for the Pound in the week ahead will be the third parliamentary vote on the government’s EU Withdrawal Agreement, although an exact date is yet to be set. 

If Parliamentarians support the bill the UK will leave the EU on May 22 under the Withdrawal Agreement. But if MPs reject it then there the government has said it will offer a series of "indicative votes" to MPs, giving Parliament an opportunity to express its desired course.

At that point there will still be a risk that the UK leaves the EU without a deal and the key date in focus will be April 12, although this could change the moment the EU agrees to a further extension, if and when it does. 

If Parliament was succesful in foisting another referendum or a general on the electorate, another much longer extension is sure to be required, alongside participation in the EU parliamentary elections. 

However, and alternatively, if Parliament was to back the idea of a customs union with the EU or some other model of post-Brexit relationship it's possible that no further extension would be required as the details of such a relationship would be thrashed out in the second stage of the negotiations.

But the government must notify the EU of the path it intends to take before April 12.

“Leaving on April 12 without a deal is now the default path, and while that will most probably be avoided at the end, the mere fact this massive risk still lurks in the background is likely enough to keep sterling under pressure for now,” says XM's Hadjikyriacos.

On the data front, the next key release for the Pound is the final estimate for final quarter GDP growth, due out at 09:30 on Friday. Consensus is for growth to be confirmed at 0.2% for the final quarter and 1.4% for 2018 as a whole.

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