Indian Rupee Surges vs. Pound: The Next Targets
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- GBP/INR breaks below March lows and declines
- Next stop 88.00 neckline and then maybe even lower
- Rupee jump follows election results
The Pound-to-Rupee exchange rate is trading at 88.61 at the time of writing, after declining 0.8% this week so far largely on expectations Narendra Modi would return as prime minister with a healthy share of the vote after election exit polls showed him taking a convincing lead.
Pound Sterling weakness has meanwhile been fuelled by heightened Brexit uncertainty after cross-party talks crumbled last week and Theresa May’s leadership was challenged.
It is now likely she will step down in the summer, with a likely ‘Brexit-hawk’ taking her place, further weighing on the outlook.
Concerning the outlook from a technical perspective, the pair is declining towards its next target at major support between 87.75 and 88.00, as highlighted in our previous technical forecast.
More broadly, it has formed a bearish head and shoulders topping pattern, which suggests weakness on the horizon for the pair. The 87.75 - 88.00 level is the neckline for the H&S.
The H&S pattern is composed of three peaks, the central one of which is ‘the head’ (in the middle) with two slightly lower peaks either side: ‘the shoulders’. The neckline connects the intervening trough lows and is used as a confirmation level. If the exchange rate breaks below the neckline it confirms more downside.
A break below the neckline would give the go-ahead for a deeper decline down to a target at roughly 84.25, at the level of the 200-month MA, a key support level for the pair. This could well happen over the next 1-4 week period given the major risk events on the horizon.
There is also a possibility of a further decline to another target that is even lower at 81.25, which is based on a percentage of the height of the pattern extrapolated lower. This might take longer to achieve, with between 3-6 months as a possible time horizon for the target.
The pair has successfully broken below the 50-day MA at 90.84 and the 200-week MA at 90.27 and is on its way down towards the neckline.
We expect the trend lower to continue subject to confirmation from a break below the 88.30 day’s lows. Such a move would result in a continuation to 87.75-88.00 neckline zone, probably during this week.
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The Indian Rupee Boosted by Modi
The main event on the horizon for the Rupee is the announcement of the winner of the Indian general election on Thursday, May 23. Current expectations, based on exit polls, are that the governing BJP party will win a majority and continue to rule with Narendra Modi at its head.
A party or coalition needs 272 seats in parliament to form a government, and four exit polls saw big wins for the BJP-led National Democratic Alliance (NDA), predicting that it would win anywhere between 280 and 315 seats, far more than the Congress party.
Such an outcome would be positive for the Rupee as it would indicate a continuation of the status quo. Modi has been credited with modernising the Indian economy and financial markets would react positively to his reinstatement.
The main area of uncertainty is the extent of the win and whether it will be sufficient to provide Modi with the mandate he needs to continue with his reform agenda.
But, exit polls can also be quite inaccurate and analysts warn exit polls have often been wrong in the past.
Therefore, the Rupee might actually be holding back some of its potential as traders await a more decisive confirmation.
The bigger BJP’s win is, the more of a boost it is expected to give the Rupee.
The other key driver of the Rupee is global risk trends. When investors grow risk averse they tend to exit riskier emerging market (EM) assets such as Indian equities and put their money into safer assets; the outflows have a negative effect on the Rupee.
The collapse of trade talks between China and the U.S. will have weighed on the Rupee. There seems little chance of a deal being done to improve matters in the short-term, however, as the gulf between the two negotiation camps remains too wide. The U.S, for example, wants to maintain tariffs so as to close the deficit - the Chinese, however, want all tariffs removed.
Trump’s most recent reflections on the deal reveal he wanted a deal which favoured the U.S. more than China, and therefore, wasn’t, in his own words exactly “50/50”.
In an interview on Sunday, Trump said to Fox News that he told Xi the agreement “can’t be like a 50/50 deal”. And, ”you are so far ahead from presidents that allowed you to get away. This can’t be a 50/50 deal.”
Trump further claimed: “We had a very strong deal. We had a good deal, and at the end, they changed it. And I said, that’s OK, we’re going to tariff their products”. And, “it hurts China so badly.”
The Rupee is unlikely to benefit from a breakthrough in talks and according to analysts at ING, there is unlikely to be any let-up until the next major opportunity for a detente at the G20 summit on June 28-29, at which both president’s Trump and Xi will be present.
There is more of a risk that the relationship could worsen. The U.S. is already investigating the possibility of imposing tariffs on an even wider number of Chinese imports. Such a turn of events would contribute to weakening the Rupee, although it is unlikely they will happen over the next 5 days.
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