Pound Poised for a Breakout vs. Indian Rupee
The Pound-to-Indian Rupee exchange rate is trading within an ever-decreasing range and given it could theoretically breakout in either direction the outlook remains uncertain.
The daily chart shows the formation of a symmetrical triangle which looks almost complete and either has wave D and E to finish or is already in the process of finishing E - most triangles are composed of five waves.
Eventually, it will breakout and we are biased to expecting a breakout higher given the trend prior to the formation of the triangle was up, and because a move lower somehow wouldn't look 'right'.
Our preferred case of a breakout higher would find confirmation from a move above the b-wave highs at 87.40 to an upside target at 89.10.
Alternatively, a breakout to the downside would gain confirmation from a move below c-wave lows at 85.20 to a target at 84.30 and the level of the 200-day MA.
The targets are calculated with the aid of the standard technical method of extrapolating the golden mean of the height of the triangle at its widest from the breakpoint higher and lower, although in the case of the down target the 200-day is such a formidable level that we established our target there instead.
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Fundamental Themes
The Rupee's economic fundamentals are mixed, reflecting the lack of trend in price data.
Recent purchasing manager data at the start of January was positive, in line with global trends, and showed Indian Services and Manufacturing sectors moved from contraction into expansion at the end of 2018.
A negative factor, however, is the rising price of oil, which India has to import and accounts for a third of its balance of trade.
Morgan Stanley are constructive in their latest research note.
"We continue to like the fundamentals of positive real rates, improving growth and a positive BoP for INR," says Chun Him Cheung, Strategist at Morgan Stanley.
"Progress on bank recapitalization is supportive for growth and equities over 2018."
However, Chun also highlights the risks and turns neutral the currency for now:
"The key risks to INR could come from rising oil prices and the evolving inflation and fiscal dynamics. For now, we take profit on the trade and turn tactically neutral on the currency at these levels."
Data and Events in the Week Ahead
Trade data is the first major release for the Rupee in the coming week and is scheduled for release at 12.05 GMT.
December's trade deficit is forecast to narrow to -12.4bn from -13.8bn in November - which is positive for the Rupee as it indicates rising net demand.
The rest of the data is out on Friday, January 12, with inflation at 12.00, expected to rise to 5.07% in December from 4.88% previously.
Manufacturing and industrial production are out at 12.00 too and forecast to show higher growth in November.
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