Pound-Indian Rupee Outlook: Downtrend to Resume as Bearish Targets Unmet
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- GBP/INR rebounds but forecast to capitulate
- Downtrend still remains intact and bearish targets unmet
- Rupee to be driven by RBI decision and trade war news
The Pound-to-Rupee exchange rate is trading at around 86.17 on Tuesday, after rising 1.67% already so far this week.
Studies of the GBP/INR charts suggest that despite a recent sharp reversal higher, the exchange rate remains in an overarching downtrend which will probably trade lower in the short-term, or at least revisit last week’s lows.
The four-hour chart - used to determine the short-term outlook, which includes the coming week or next 5 days - shows the pair having undergone a strong recovery after basing at the July 30 lows.
The question is whether the recovery is strong enough to signal a reversal and suggest more upside on the horizon? Whilst this is a possibility it is too early to say that is the case with GBP/INR.
By default, the trend remains down and given the principle that ‘the trend is your friend’ it is expected to extend lower.
The RSI has just exited overbought zone and this is technically a sell-signal further suggesting more downside on the horizon.
A break below the 83.33 lows would probably signal a continuation down to a target at 82.00.
The daily chart - used to give us an indication of the outlook for the medium-term, defined as the next week to a month ahead - shows the pair having risen up and stalled at the level of the 50-day moving average (MA). The MA could be a tough nut to crack and may provide a ceiling for the pair.
RSI momentum is constructive suggesting bullish confidence, however, given our base bearish case for the pair we still retain downside view, albeit with growing reservations.
Accordingly, our expectation is that a break below the 83.33 July 30 lows would signal a continuation, first down to the 82.00 short-term target, and then down to the more important 80.75 target in the medium-term.
The weekly chart - used to give us an indication of the outlook for the long-term, defined as the next few months - shows how a bearish H&S topping pattern has formed.
The H&S is composed of three peaks - a head and two shoulders. It has broken below the neckline, confirming a decline as deep as the pattern is tall.
This suggests an eventual conservative downside target at 80.75, but a potential target even lower at around the 79.50 lows, which is our new longer-term target for the pair.
The formation of a bullish hammer candlestick last week (circled) is a contrary indicator and suggests the possibility the downtrend may be cut short and the pair could start a new trend higher, however, without confirmation from a strong bullish close this week, it is too early to say for sure.
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The Rupee: RBI Dominates Outlook
The main fundamental drivers of the Rupee in the week ahead are likely to be the Reserve Bank of India (RBA) policy meeting on Wednesday and news of the evolving trade war between the U.S. and China, especially if it worsens.
The RBI will publish the deliberations of their meeting on Wednesday at 7.15 BST and these are expected to yield a 0.25% cut in the central bank’s base interest rate of 5.75%, according to consensus estimates.
The RBI’s base rate is seen as too high given inflation remains subdued in India and still below the 4.0% target. A shaky global macroeconomic backdrop because of trade tensions and a slowdown in world manufacturing are further reasons to expect a cut.
The RBI has cut rates three times in as many meetings and the Rupee could be impacted if the bank continues to signal the probability of more cuts in the future - or conversely if it hints the easing cycle may be coming to an end.
"It will be important to study the policy narrative to get a direction of likely future action by the RBI, liquidity measures, any other structural changes etc. Suffice it to say that inflation will be the central theme balanced with the need to boost growth," says Shanti Ekambaram president of consumer banking, at Kotak Mahindra Bank.
A 0.25% cut is already priced in but a deeper 0.5% cut is a tail risk and would weaken the Rupee.
Global factors could also impact the Rupee as the latest battle if the U.S. -China trade war continues unfolding.
The U.S. recently threatened to add 10% tariffs on the $300bn of Chinese imports which do not currently have tariffs and the Chinese retaliated by canceling all their orders of U.S. agricultural goods.
The Yuan devalued steeply due to the spat and because China appeared to be doing nothing to intervene, the U.S. officially called China a currency manipulator. Although markets eased on Tuesday with the news that the Chinese have finally intervened to support the Yuan, the two superpowers remain at loggerheads.
The Rupee is highly correlated to the Yuan so yesterday’s weakness partly explains the similar fall in the Rupee. Although things have stabilized temporarily there remains a risk of further flare-ups and declines in the Chinese currency, resulting in similar declines for the Rupee.
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