Pound-to-Rupee Rate Marginally Lower After Inflation Miss - Forecast to Fall In Week Ahead

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GBP/INR is little changed after the release of Indian inflation data showed slowdown in price growth in January.

Inflation data came out at 5.07% in January, below estimates of 5.14% and a previous reading of 5.21% in December. 

The GBP/INR pair fell marginally to 88.70 from 88.80 prior to the release, reflecting a slight strengthening of the Rupee.

Although lower this was still around the 5.0% level which some analysts see as the likely average in 2018, and negative for the Rupee. 

"The Reserve Bank of India does not expect inflation to be a major problem in the next 12 months but it does see it averaging around 5%, which is above the 4% mid-point target. As such, it makes sense for INR to be on depreciation bias vs USD in the coming year as domestic inflation will be higher than the US and no major productivity improvements are seen," says Commerzbank analyst Thu Lang Nguyan. 

From a purely technical perspective, the Pound-to-Rupee exchange rate has risen up to a key resistance level on the chart and further upside progress may be limited. 

Our technical studies of the GBP/INR charts allow us to gain an objective steer on market direction and we note a resistance level lies between 90.00 - 91.00 Rupees, and consists of the major April 2015 lows and a major trendline drawn from the 2015 highs.

These are illustrated on the monthly chart below.

They are expected to act as significant obstacles to further upside because technical traders will use these levels as areas to sell the Pound in expectation of lower prices, and this will increase supply and pressure the currency pair lower.

The weekly chart - which offers a longer-term perspective - shows how the pair has already weakened after interacting with these key levels, pulling back in a long red down bar/candle last week.

The daily chart below provides us with yet more detail of the move down, however, it does not provide us with any more insight into future activity.

The normal method of forecasting using technical analysis is to establish the trend and then extrapolate, however, in the case of GBP/INR it is difficult to establish whether the trend remains up or there is now a new short-term trend down beginning.

We normally use the four hour chart to establish the direction of the short-term trend and the four-hour chart shows the trend now appears to be down, given the progression of peaks and troughs lower. 

This, taken together with the resistance nexus on the monthly chart seems to be suggesting the exchange rate could be changing trend and moving lower, and assuming it can break below the 88.50 confirmation level we expect it to sell-off down to 87.50 where the 50-day moving average is situated.

Large moving averages are levels of dynamic support and resistance where strongly trending prices often stall, pull-back or even reverse trend sometimes, due to the increased buying and selling around them as traders and investors often use moving averages in their decision-making.

The MACD is suggesting the downmove from the February 2 highs may have run its course for now, however, due to the pattern formed by the MACD which has made two lows below the zero-line interupted by a move above the line inbetween (circled), and this can signal a phase of selling my be over. 

It does not discount the possibility of an extension lower in the future, however.

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Data and Events to Watch for the Pound

From a data perspective inflation and retail sales releases dominate the outlook for the Pound in the week ahead.

Inflation is a driver of interest rates which in turn influence the Pound, so a rise in inflation will lead to a stronger Pound. On Thursday, February 8 the Pound rallied as the Bank of England communicated that interest rates might have to rise faster than previously anticipated in coming months in order to combat persistently high rates of inflation.

The Bank and markets alike will therefore be watching the latest installment in UK inflation data to see where the trends lie, the release is due out on Tuesday, February 13, at 9.30 GMT.

Forecasters expect a 2.9% rise compared to a year earlier (yoy); in the previous month of  December, the inflation rate was a higher-than-expected 3.0% (yoy).

On a monthly basis, inflation is expected to decline by -0.6% in January.

Core inflation, which strips out volatile food and fuel components, is forecast to rise by 2.6% compared to 2.5% previously; often it is this number that moves markets.

On all accounts, should the data come in below expectation we would expect Sterling to decline, and should data beat expectations we would expect Sterling to rise.

The other main release is retail sales, which is scheduled for release on Friday, February 16, at 9.30.

A higher-than-expected result could reaffirm the UK economy's resilience and support Sterling.

Retail Sales is forecast to rise by 2.6% in January compared to a year ago when it only gained by 1.4%. Month-on-month it is forecast to increase by 0.5% from -1.5% previously.

Kathy Lien, managing director of BK Asset Management, forecasts lower-than-expected inflation and retail sales data, which could weigh on the Pound.

"Looking ahead, the UK's inflation and retail sales reports are scheduled for release and if the data surprises to the downside like we expect, it may be difficult for GBP to rally," says Lien. 

Data aside, the other major factor for Sterling in the coming week is likely to be how Brexit negotiations evolve.

The Pound fell last week following the revelation that the EU was reconsidering whether to allow the UK a two-year transition phase deal after the official Brexit deadline in 2019, in order to help negotiate a new trade relationship.

After a breakdown in talks over the nature of the UK's rights during the transition period itself, Chief EU Brexit negotiator Michel Barnier said that if the disagreements continued it was "not a given" the UK would even get a transition period at all.

This took the wind out of Sterling's sails after it rose strongly following the Bank of England's positive assessment of the economy on Thursday.

"Instead of making progress this week, Brexit negotiations have taken a step back and to the dismay of sterling bulls, this overshadowed the BoE's hawkishness," concluded Lien.

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