Pound and Rupee Tipped to Trade Sideways, Bank of England Could Trigger More Substantial Directional Move

Technical studies suggest GBP/INR will trend sideways this week but the Bank of England event on Thursday could shake direction in this exchange rate.

The Pound-to-Indian Rupee exchange rate peaked in late September and then lost ground, falling over two and a half percent at the start of this month.  

The pair has now stopped falling and is trading in a sideways range between the 86.55 and 84.90 levels.

Sideways action therefore appears to be the most likely route going forward, but if pressred to take a more directional view, we would say that because the move prior to the formation of the sideways range was bearish, the move afterward will probably also be bearish.

But for confirmation of a breakout lower, we would first wish to see a move below 84.80, which would then probably lead to a continuation down to a target at 83.50, based on the height of the range at its widest point (a) extrapolated lower from the breakpoint (b).

The target is also just above the 200-day moving average (MA) and the lower trendline of the rising channel, which are both levels expected to stall any progress lower.

Get up to 5% more foreign exchange by using a specialist provider by getting closer to the real market rate and avoid the gaping spreads charged by your bank for international payments. Learn more here.

Data and Events for the Indian Rupee

The two main releases for the Rupee in the week ahead are probably Manufacturing and Services PMI, which reveal the latest levels of activity in these sectors based on surveys of purchasing managers.

Manufacturing PMI for October is out on Wednesday at  06.00 GMT and is forecast to show a rise to 51.5 from 51.2 previously.

Services PMI is out at 06.00 on Friday, November 3, and is expected to show a rise according to data website trading economics to 51.8 from 50.7.

Unexpected gains in either of these releases are likely to result in strength for the Rupee.

The Reserve Bank of India (RBI) has adopted a neutral stance which leaves the exchange rate unaffected.

The lack of inflation is a major reason for not expecting the RBI to raise interest rates and therefore provide the INR with support - currencies generally move in the same direction as interest rates so no-change means a neutral outlook for INR too.

This also appears to be a long-term view of DBS Bank Ltd's Economist Radhika Rao, who said in a recent note:

"We assign a low probability that the RBI will switch to a tightening bias next year as the fiscal push is unlikely to turn extraordinarily populist despite approaching state/general elections."

BoE Centre Stage in Week Ahead for the Pound

The big event to watch with regards to GBP/INR direction in the week ahead is the Bank of England's Inflation Report and Monetary Policy Decision, due on Thursday, November 2. 

Money markets are currently pricing in a 90% chance that the Bank will raise interest rates - so the immediate risk to Sterling is if they don't raise rates. In such a scenario expect the Pound to plummet.

Such a move would be unlikely however as the Bank's Monetary Policy Committee know their reputation is at stake; in short, there will be few who take the words of Governor Mark Carney and his lieutenants seriously should he not follow through with a 0.25% rate rise.

An interest rate rise on its own would be neutral, as it is well signposted. What matters is communication regarding future policy moves - is there going to be a follow-up rate rise in 2018 or not? If yes, this would be positive for Sterling, if no, this would be bearish.

Financial markets are now pricing in a rise in 2018 which is more in line with Carney's view and so he may express satisfaction that they are correctly pricing probabilities.

"The picture is still cloudy enough for some UK rate-setters to question the need for immediate action. Nevertheless, we expect the Committee to move ahead with a 0.25% increase," says Lloyds Commercial Banking's Senior Economist Rhys Herbert, adding:

"With regard to the Bank’s forward guidance, of most interest will be whether Carney reiterates his previous assertion that markets are underestimating the potential for interest rate rises."

Yet at the same time, Carney is still expected to emphasise that interest rate rises are likely to be "gradual".

The big debate for Sterling going forward is whether the interest rate is a once-and-done affair or the start of a new cycle.

Whichever side you fall on is likely to determine whether you are bullish, or bearish on Sterling.

“For investors, the key question is whether or not there will be further hikes next year. Market expectations are for at least one further 25bp hike next year. In contrast, we think the MPC will be making a mistake by hiking now, and that they will recognize this in the coming months,” says Daniel Vernazza, UK economist at UniCredit.

On the other side of the coin is the view that we are at the start of a new cycle of rate rises.

“It is not clear to us that UK growth is about to falter suddenly. There may be further Brexit negotiation uncertainty, but there is arguably a lot of it already. Instead, we prefer to trade with conviction the idea that this is not a policy mistake and that the BoE is on a hiking cycle,” says Jordan Rochester at Nomura.

As a result, Rochester is betting the Pound-to-Euro exchange rate will rise towards 1.15 near-term.

PMIs

Another major release for the Pound in the week ahead is the results of the October Purchasing Manager surveys for Manufacturing, Construction, and Services.

These are out at 9.30 on Wednesday 1, Thursday 2 and Friday 3 respectively.

Manufacturing is forecast to fall to 55.8 from 55.9 by the consensus of economists, although, some such as Lloyds's Herbert see an even lower result as likely due to the decline in the CBI Industrial Trends survey last week.

However, this is with the proviso that the Manufacturing PMI has been overall in an upbeat trend.

Lloyds Bank's Herbert is more constructive about Services PMI which he expects to come out at 54.0, however, the consensus expectation is for a fall to 53.2 from 53.6.

Finally, in the coming week Brexit Minister David Davis is to be questioned on the progress of negotiations on Tuesday at 16.05 (UK), and clearly how he answers is likely to impact the Pound given how hypersensitive the currency is to Brexit headlines.

Get up to 5% more foreign exchange by using a specialist provider by getting closer to the real market rate and avoid the gaping spreads charged by your bank for international payments. Learn more here.