The Pound-to-Indian Rupee Rate's Forecast for the Week Ahead

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The Pound-to-Rupee rate is still in an uptrend and this week sees the potential for much volatility due to both currencies' central bank's having their policy meetings.

GBP/INR is in an uptrend, which although showing signs of weakness, is still intact and therefore liable to run higher.

We continue to forecast more upside, at least to the level of the 200-week moving average (MA) situated at 92.55 Rupees to the Pound.

However, at that level, the pair is likely to stall, or rotate and lose ground, given the strong resistance which usually comes from large moving averages.

This is because of several factors, such as the fact that large funds often make investment decisions based on whether the price is above or below a major moving average, and this increases buying and selling in their vicinity.

Technical traders also often make trades against the trend at the level of major moving averages expecting to piggy-back the volatility around them, and this has the effect of increasing it.

The MACD momentum indicator in the bottom panel of ther daily chart (above) is tapering (getting closer to its signal line) suggesting it could be about to go down, which is slightly bearish for GBP/INR, but the fact that the overall trend is still up taking precedence. 

Data and Events for the Indian Rupee

The main event for the Rupee in the coming week is the Reserve Bank of India's (RBI) interest rate decision on Wednesday, February 7 at 9.00 GMT.

Even though inflation is relatively high at 5.2%, which is above the RBI's median target rate of 4.0% (+/-2.0%), the central bank is not expected to lift rates from their current 6.0% level at the meeting, since, though high, inflation has not yet risen above the upper boundary (6.0%). 

Inflation is expected to increase, however, in part due to the generous budget announced last week which focused a lot of help on farmers, including rich subsidies (MSPs or Minimum Support Prices) in the form of guaranteed wholesale prices and these are expected to filter through into higher shop prices and higher wages, both of which are inflation inducing.

"Of interest is the extent which the increase in the proposed minimum support prices (MSPs) will spill over onto rural/farm wages and, by extension, demand conditions. Details are scant at the point of writing. In the past, a sharp increase in MSPs have coincided with high food inflation and spurred concerns over-generalised price pressures. In resisting a premature tightening in rates, we reckon that the RBI will flag the projected fiscal slippage, oil, and higher MSPs as risk factors," says DBS Economics.

That the RBI will raise rates in 2018 is Singapore-based OCBC's view, who project one 0.25% hike this year, although not as soon as next week's meeting.

"The RBI is expected to raise its benchmark repurchase rate in 2018 as an attempt to manage accelerating inflation while economic growth is undergoing a recovery," says OCBC.

Higher interest rates are usually positive for currencies as they attract foreign capital inflows drawn by the promise of higher returns.

An explicit nod to rate hikes in the RBI statement or press conference, therefore, would be expected to give an early boost to the Rupee next Wednesday. 

Data and Events to Watch for the Pound

The main event in the week ahead for the Pound is the Bank of England (BOE) rate meeting on Thursday, Feb 8 at 12.00 GMT.

Analysts do not expect a change in interest rates so the focus instead will be on attempting to guess when the next change will come by analysing voting patterns, the wording of the statement and governor Carney's verbal responses to questions in the press conference after.

If the evidence points to a rate rise getting more likely then the Pound will rise; if not then it will fall.

Brexit risks continue to cause uncertainty about the outlook and weigh on the BOE's reaction function, and given those risks have not changed substantially, little change is expected, and possibly a muted response from Sterling.

The other main event is the release of the BOE's Quarterly Inflation Report at the same times as the meeting, and given inflation is one of the main factors which lead to higher interest rates, and interest rates are positively correlated to the Pound this too could impact on Sterling.

If economic growth and inflation forecasts are revised higher expect Sterling to catch a bid.

"We have long-argued that interest rates would rise somewhat faster, and sooner than markets expecting. Recent comments by Governor Carney offer tentative support to this view and suggest that February’s Inflation Report could strike a more hawkish tone than is anticipated," says Paul Hollingsworth economist at Capital Economics.

Inflation is currently 3.0% and has been caused mainly by the depreciation of Sterling since the EU vote in June 2016. The BoE has said it is willing to allow inflation to overshoot for a limited period before tackling it, however, Hollingsworth thinks they may start to show an impatience, given the stronger-than-expected performance of the economy. Such a change would be expected to lead to a modest rise in Sterling.

Other significant data in the coming week include the services sector PMI out on Monday at 9.30 and Halifax house price data for January out at 8.30 on Tuesday. Industrial, manufacturing and trade data round off the week.

Markets are expecting a reading of 54.3 from Monday's service sector PMI - anything better will likely set Sterling on a strong footing at the start of the new week, while disappointment could add to the bearish tone.

"While most of the early data was suggesting we could see the services sector run flat, the weak prints on both the manufacturing and construction PMIs last week now points to the Services PMI declining from 54.2 to 53.2, versus a consensus of 54.0, though we suspect that may likely drift lower by the time of release. The January PMI so far suggest the adjustment in the housing sector persisted into January while more of the demand was coming from external sources rather than domestic, all suggesting no reason the Services PMI should outperform the softer January data," says a note on the matter from TD Securities.

The Halifax data may garner interest because last week's Nationwide data showed an unexpected surge in house prices in January, which lifted Sterling, and the market will be looking to the Halifax data to corroborate it.

Friday, meanwhile, sees the release of manufacturing and industrial production and the trade balance for December, all out at 9.30.

Markets are eyeing monthly industrial production to have slid 0.9% in December with the manufacturing production number showing an increase of 1.2%.

Trade data should show a balance of -£11.60BN as the UK continues to import more than it exports.

With regards to the above, the manufacturing data is expected to have the most impact on Sterling.

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