GBP/INR Continues Declines After Break Below Neckline of H&S

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- GBP/INR rate downtrend set to extend this week.

- After break below neckline of H&S pattern on charts. 

- Rupee also likely to be driven by volatility in oil prices.

The Pound-to-Rupee rate was trading around 85.40 Wednesday after falling a third of a percentage point so far this week and studies of the charts suggest the exchange rate will probably trade with a bearish bias in the short-term.

The exchange rate is converging with the relative-strength-index (RSI) momentum indicator, which is a bullish sign. 'Convergence' is where price makes a new low but the RSI does not and normally suggests that downside momentum is waning.  

In this case the convergence is quite acute, which increases the probability of a rebound higher. However, the pair has now broken below a key support line, or ‘neckline’, which is a more compelling signal of a substantial continuation lower.

Furthermore, the overall trend remains bearish and appears more likely to extend, with a break below 85.30 providing confirmation for a continuation down to the 84.50 area and the October 2018 low. 

The 4hr chart is used to analyse the short-term trend, which is defined as the outlook for the next 5 days.

Above: GBP/INR rate at 4-hour intervals.

The daily chart shows the pair in an established downtrend, which is biased to continue lower. A break below 85.30 could eventually lead a decline down to our target of 84.50. Any break below that level would imply a move down to 81.95. 

The daily chart is used to analyse the medium-term trend which is defined as the outlook over the next one-to-four weeks.

Above: GBP/INR rate shown at daily intervals.

The weekly chart shows the pair has formed a bearish head and shoulders (H&S) topping pattern, which is normally a very negative sign. It is composed of three peaks that form a head and two shoulders. A break below the neckline triggers the subsequent decline.

The pair has now definitely broken below the neckline of the pattern on the weekl chart, suggesting it will continue lower. This could lead the market down to an eventual end target of 80.75, which is calculated by taking the height of the pattern at its tallest and extrapolating it down.

A break above the red trendline would negate the bearish forecast. The weekly chart is used to analyse the long-term trend which is defined as the outlook over the next couple of months.

Above: GBP/INR rate shown at weekly intervals.

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The Rupee: What to Watch Out For

The main fundamental driver of the Rupee in the days and weeks ahead is likely to be the price of oil, given the absence of any major economic data releases in the short-term.

Fluctuations in the price of oil have been found to directly influence the Rupee because it accounts for a third of all imports into India. When oil prices rise it increases the Indian trade deficit, risks depleting foreign exchange reserves and transfers wealth from India to oil exporting nations. The link is backed up by research too. In “Crude oil prices and the exchange rate in India,” researchers Sharma, Rishad and Kumar concluded there is a causal link.

"The results of Granger non-causality test indicate that there is a unidirectional causality running from oil price to exchange rate, not vice versa. This result is substantiated by the movement of Rupee exchange rate during the period of study," say the paper’s authors.  

Oil has risen strongly at the start of this week after inventory data revealed a larger than expected drawdown last week, reflecting strong demand. Of particular note was the U.S. inventory data out on Wednesday, which showed inventories declining by -9.5m barrels in the previous week when they had been expected to fall by only -3.1m. 

Other factors driving up the price are continued Middle East tensions and the evacuation of oil rigs in the gulf of Mexico due to the proximity of an approaching storm.  

“As oil producers begin to evacuate staff from their platforms in the Gulf of Mexico ahead of a possible storm, oil prices continued upwards, booking their fourth consecutive daily gain in a row. Among the factors driving them higher, in addition to the now chronic Middle Eastern tension, was the news Russia’s oil production had fallen near a three-year low in June, later supported by API’s inventory report,” says Irina Slav, a reporter at Oilprice.com.

Heightened geopolitical tensions and uncertainty in the middle east, especially with regards to Iran, is also likely to keep prices underpinned. At the time of writing the price of WTI crude oil is 59.58, up 2.85% on the day. Brent crude is trading at 66.05, after rising 2.95%.  

The next major oil release is the OPEC monthly report out at 12.00 on Thursday, July 11 and then the IEA monthly oil market report, out on Friday the 12th at 9.00, and which “covers major issues affecting the world oil market and provides an outlook for crude oil market developments for the coming year. 

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