Pound-Rupee Rebounds Bringing Downtrend into Question
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- GBP/INR recovers strongly and breaks higher
- More upside could negate bearish pattern
- Rupee driven by volatile oil market
The Pound-to-Rupee exchange rate is trading at around 88.45 at the start of the new trading week, marginally down on the week before, with studies of the charts suggesting the pair is at a crossroads, with signs it might even rebound over the next few days.
After successfully piercing below the ‘neckline’ of a major topping pattern, the pair rebounded on June 18 and broke back above the neckline, and in the process, indicated a surprising degree of strength.
It now seems unlikely that the pair has undertaken what is known as a ‘throwback’ move. These occur in the midst of downtrends. They are temporary recoveries after a break of a major level. They constitute a pause before the trend starts going lower again.
Given the rebound has gone further than would be expected for a throwback move, there is a rising chance it could be a more permanent recovery and a substantial uptrend evolving in the week to come.
The rally from the June 18 lows has completed two sets of higher highs and higher lows which is a further sign - if only very tenuous - that a new uptrend could be developing.
A break above the 88.81 highs would open the way to an extension higher to a target at 89.50.
Alternatively, given the overarching downtrend, there is still a possibility the pair could capitulate and resume its bear trend, and a break below the 87.05 level would probably lead to a continuation down to a target at 86.50.
The 4-hr chart is used for short-term analysis which is defined as the next 1-5 days.
The daily chart - which gives us a view for coming days and potentially the next couple of weeks - shows the longer-term downtrend and the recent sharp rebound.
It suggests the outlook for the pair over the medium-term is neutral with further downside conditional on a break below the June lows.
The pair might very well go sideways in the medium-term, oscillating between the 88.81 highs and the 87.13 lows.
A break above the highs would probably open the way to a move up to the important trendline at 90.55.
A break and a close on a daily basis above the trendline would negate the topping pattern altogether and lead to a probable surge higher in a short-covering rally as bears are wrong-footed.
A break below the 87.13 lows, however, would probably lead to a continuation down to a target at 84.75.
We use the daily chart to give us an indication of the medium-term outlook which includes the next week to a month ahead.
The weekly chart shows the bearish head and shoulders (H&S) topping pattern more clearly.
These patterns are very bearish: a break below the neckline triggers a sharp subsequent decline.
As such, a break below the 87.13 lows would probably lead to a sell-off down to 80.75 in the longer-term.
The second target is roughly equal to the height of the pattern extrapolated lower, the usual method for forecasting follow-through for an H&S.
Only a break above the trendline drawn from the peak of the pattern connected to its right shoulder at around 91.60-90 would invalidate the H&S’s bearish potential.
It is important to note that even on the weekly chart there are signs the pattern may fail.
The pair formed a rare ‘key reversal’ bottoming bar in the previous week (circled), which is often a sign of a major trend change.
The key reversal occurs when the market breaks to new lows but then recovers and climbs to close at a new higher high - all in the space of one period. It can herald a long-term change in trend.
We use the weekly chart to give us an idea of the longer-term outlook, which includes the next few months.
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The Rupee: What to Watch
The main fundamental driver of the Rupee at the moment is the price of oil, which India has to import in bulk to meet its not inconsiderable energy needs since it is unable to produce enough of its own energy.
When oil prices rise it tends to have a negative impact on the Rupee since more Rupees have to be sold to buy the same amount of (imported) oil. This appears to be what was behind the rebound in GBP/INR last week.
Oil prices spiked after two tankers were attacked in the Persian Gulf. Iran was suspected of foul play but nothing was proven.
The situation escalated when the Iranians shot down a U.S. military spy drone in the Strait of Hormuz last week, leading to fears of a war starting between the U.S. and Iran, which led to a further spike in the price of oil, which rose by over $5.00 a barrel as a result of supply fears.
The importance of cheap oil for India was highlighted by the news that the Indian oil minister had travelled to Saudi Arabia to ask the Saudi’s, who are seen as a regional leader, to use their wealth and influence to bring some stability to oil prices.
“That India is calling on Saudi Arabia as the one who could potentially lessen the oil price blow is no surprise. Saudi Arabia has the most available capacity of all the OPEC members, although it has not yet responded to pleas for it to crank up the production,” says Julianne Geiger, a reporter at Oilprice.com.
It remains to be seen whether the Saudis will respond to pleas to 'crank up production' in order to help stabilize prices. There is a risk they may do.
The next OPEC meeting is on July 1 and may present an opportunity for the Saudis to announce a change in supply constraints. Currently OPEC has taken the step of curbing production to keep prices higher. Any relaxation would lead to a fall in prices, helping the Rupee.
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