Pound-to-Rupee: Tech Forecast, News, Views and Data for the Week Ahead

The Pound-to-Rupee is probing a trendline following a relief rally from easing Brexit tensions due and expectations of a rate cut from the Reserve Bank of India (RBI) could provide the catalyst to further propel the exchange rate higher. 

Broadly speaking there no strong directional trends in GBP/INR at the moment.

On the four hour chart, we note that the Pound-to-Rupee is testing a trend line which it appears to be 'trying' to break above to establish a new short-term uptrend.

If it fails to break above the trendline the pair will technically-speaking remain in its short-term downtrend.

We would then look for a break below the 85.086 lows for confirmation of an extension lower to the psychologically significant 84.500 level initially,

At that level we would expect some covering, taking profit and buyers to come into the market, providing support.

But the velocity of the rally since the establishment of the 85.086 lows also suggests a higher than usual probability that the pair could successfully break out above the trendline and extend higher too.

For confirmation of such a break, we would first want to see a move above the 85.959 highs, which would then probably reach to a minimum target at 86.400.

The target is calculated using the theoretical method of taking the height of the rally prior to the trendline break (X) and extrapolating it after the break for the end of the follow-through move (Y).

To calculate the minimum target the extrapolation is only by 61.8%, which equates to the golden ratio, a mathematical concept which reflects patterns and underlying schema in the natural world and financial markets.

Data, News and Events for the Indian Rupee

The Indian Rupee continues to trade in a broad range versus the Pound as drivers remain mixed and sometimes contradictory.

Softer growth, falling inflation and a reluctance to embrace pro-growth strategies by the government have put a brake on previously break-neck Indian growth, in, for example, 2016, when it took over from China as the fastest growing economy in the world.

Yet despite a plateauing of late the economy still has major advantages, such as built-in diversification across sectors, high levels of English-speaking in the population due to a colonial past and now with commodity markets so cheap an advantage over more resource based export economies.

Yet, despite strong basic fundamentals there now appears to be a strong possibility the Reserve bank will cut interest rates at its December meeting, according to Bank of America Merrill Lynche's India Economist Indranil Sen Gupta

"We continue to expect the RBI MPC ‎to cut policy rates by 25bp on December 6 although Friday's MPC minutes sounded more hawkish than the actual October policy," said Gupta, dismissing the recently released hawkish minutes from the last meeting.

A cut in interest rates would be expected to be bearish for the Rupee which is highly correlated to rates (therefore bullish for GBP/INR).

Gupta gives six reasons for expecting a cut:

1. Soft Growth.
2. The unexpectedly low CPI of 3.1% in October.
3. A buffer with US rates, with scope for differential, which is currently at 450bps despite high Fed hike expectations.
4. The rise in some gauges of Indian inflation can be discounted as a one-off effect from government policy relaxing rent caps.
5. Government fiscal stimulus programme unlikely according to recent statements from Finance Minister.
6. Farm Loan Waivers.

As far as hard data goes, however, it could be a quiet week for the Rupee, with all the main data releases out on Friday.

Then we will see Bank Loans at 12.30 BST, Deposit Growth at the same time and finally also Foreign Exchange Reserves held by the Reserve Bank of India (RBI), with which it can defend its currency if necessary.

Bank Loan Growth rose 6.9% in September and a continued strong rise would probably support the Rupee as it would suggest rates do not have to fall any lower to stimulate borrowing and thereby growth.

The Rupee had been suffering recently under a more negative growth outlook and falling capital inflows, however, the news that the Indian stock market has reached a 12-month high is likely supportive for the currency - both now and in the future - as it shows foreign investors are probably still hungry for Indian stocks, reflecting a positive view of the economy longer-term.

Data, News, and Events for the Pound

Politics will figure highly for the Pound in the coming week.

The currency gained at the end of last week after the EU suggested round two talks on trade might begin in December, after unanimously agreeing not enough progress had been made yet to begin them now.

EU Council President Donald Tusk was particularly positive, saying he though descriptions of talks by the EU negotiator as being at "deadlock" were exaggerated.

The Pound recovered on Tusk's more optimistic comments after having sold off almost all wee.

Over the weekend we suggested there might be a 'Tusk bump' on Monday as the markets started to see a light at the end of the Brexit tunnel - and indeed this seems to be the case after GBP/EUR gapped higher to 1.1221 right at the open; currently, it is trading at 1.1223.

The main hard data release for the Pound will come in the form of the first release for third quarter GDP, out at 9.30 BST on Wednesday, October 25.

The consensus estimate is for GDP to grow at 0.3%.

The result is important because it could make the difference between whether the Bank of England (BOE) hikes rates or not in November.

"PMI data suggest the GDP numbers will show another lackluster 0.3% expansion in the three months to September, matching the performance seen in the first half of the year," said Markit IHS, Principle Economist, Bernard Aw.

Yet he suggests the GDP result would have to be a fair bit lower to change the views of the hawks on the Monetary Policy Committee.

Nevertheless, a weaker number could still the hike till December. 

"A stronger number would be seen by many as sealing the deal on a hike," concluded Aw.