Pound-to-Rupee Rate Forecast for the Week Ahead: Bearish Shooting Star Forms
- GBP/INR has undergone a correction but there is evidence suggesting it will resume its uptrend
- Upside may be capped, however, by strong overhead resistance
- The main release for the Rupee in the week ahead is PMI data; likewise for the Pound
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The Pound has weakened versus the Rupee following a decline in first-quarter UK growth data, despite fundamental headwinds pressuring the Rupee.
From a technical perspective, GBP/INR is giving off mixed signals: despite being in a medium-term uptrend the pair has formed a bearish shooting star candlestick pattern on the monthly chart, which is a negative sign for the exchange rate.
April is almost finished and so the pattern will probably endure. If May is also bearish that will add confirmation and reinforce the bearishness of the outlook.
Also, note the 50-month moving average (MA) is intersecting with the April highs on the chart at 92.74. The MA looks like it is capping gains. Very often this is the case with large MAs - they act as an impediment to further upside. Large moving averages are difficult to overcome as they are the locations of increased supply or demand due to more trading activity because they are popular indicators amongst investors.
An analysis of the daily chart below suggests a less bearish outlook.
Although the pair has pulled back down to 91.26 after peaking at 94.34 on April 17, it has formed a clear three-wave ABC pattern in the process, which is a corrective chart-pattern suggesting the uptrend will resume once it is complete. ABC patterns usually complete when the wave's A and C are of an equal length, which more-or-less appears to be the case at the moment.
A further feature of the daily chart is the 50-day MA situated at the lows of the ABC pattern, at 91.44. Given large MA's such as the 50-day are often levels of dynamic support and resistance the 50-day is likely to put a floor under the exchange rate and act as an obstacle to further downside. This further increases the likelihood that the uptrend will resume.
A further support level is afforded by the 2015 lows at 90.94. Major highs and lows like the 2015 lows can often provide added support to prices on a chart and can be more difficult for trending prices to break through.
We have highlighted the support provided by the 50-day and the 2015 lows at the current lows with an orange box filled with hatching named 'Support Zone'.
The bearish monthly and bullish daily charts contradict each other, but because the overall trend remains bullish and the daily chart is showing such a clear ABC correction, we are overall marginally more bullish than bearish.
Nevertheless, because of the contradictory signals, we would ultimately require a higher bar for confirmation of an extension of the uptrend higher, and a break above the April 17 highs at 94.34 would be necessary for us to assume further upside to the next target at 95.00.
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Data and Events to Watch for the Indian Rupee
The main release for the Rupee in the week ahead is probably Manufacturing PMI out on Wednesday, May 2, at 6.00 GMT and Services PMI out at the same time on Friday, May 4.
The Manufacturing PMI is expected to rise to 51.6 in April from 51.0 in March as activity increases. Any result above 50 reflects expansion and below 50 contraction. PMis are leading indicators for the economy. They are survey-based indicators which use answers from key procurement managers within companies in the sector under observation to generate a score.
Data and Events to Watch for the Pound
The main data release for the Pound in the week ahead will be the release of April Service and Manufacturing PMIs out at 9.30 on Thursday and Tuesday respectively.
PMI is short for Purchasing Manager Index, and PMIs are survey-based indicators which are seen as useful forward-indicators of economic activity.
The market consensus appears to be for expecting a rebound in Services in April after the drop in March, which was put down, mainly to bad weather. Services PMI in April is expected to rise to 53.5 from 51.7 and Manufacturing to 54.8 from 55.1.
The Pound may be especially sensitive to the results this week owing to the laser-like focus currency markets are currently placing on UK economic data.
Sterling fell by over a percent against both the Euro and US Dollar in the wake of economic growth data which revealed the UK economy grew a mere 0.1% in the first three months of 2018, growth that has virtually killed any prospect of an interest rate rise being delivered by the Bank of England in May.
Will the incoming data surveys point to a pick-up in activity, or will they suggest the economic slowdown is more entrenched?
From the market expecting a hike with almost 100% certainty a few weeks ago, the probabilities have now fallen to circa 50% after comments from the governor of the BoE suggested there might be a delay owing to the downturn in data.
The possibility of a delay in raising rates led to a drop in the Pound which is highly sensitive to interest rate expectations.
Expectations of higher rates tends to lift the Pound and vice versa for the lower rates. This is because higher rates tend to attract greater inflows of foreign capital drawn by the promise of higher returns and this increases demand for the Pound.
"We may see an outsized market reaction from any surprises, as they tilt markets toward or away from a May BoE hike," says Canadian investment bank TD Securities in their note on the week ahead.
The bullish market forecasts for Manufacturing are not shared by some, including Philip Shaw, an analyst at Investec, who sees risks to April's figure both from the sharp appreciation in the Pound and the heightened talk of a trade war in early April.
Shaw does, however, share the market's more upbeat forecast for Services, which he expects to rebound by three points to 54.7 due to the temporary impact of bad weather dissipating.
More generally the lack of market-moving data besides PMIs means the weak could be a slow one for the Pound.
"Domestically, next week may represent a lull before the storm provided by the 10 May Bank of England Inflation Report and MPC announcement," says Shaw. "Bearing in mind Mark Carney’s comments last week about mixed data, the decision may be more finely balanced than we had envisaged."
"But we judge that the MPC will believe that the tight labour market will override the softer than expected short-term inflation environment," concludes the analyst.
The other major event in the week ahead for the Pound is the UK local elections on Thursday, May 3 at 1.00 GMT.
The main way it could impact is via Brexit expectations, such as for example if there is a surprise outsized vote for the anti-Brexit liberal democrats, which might be Sterling positive.
If the Conservatives win a larger-than-expected majority it could impact on Sterling in two ways depending on how investors interpret the result.
It could be negative for Sterling because the Conservative party is probably the party most in favour of the 'harder' forms of Brexit.
At the same time is could be positive for the Pound if it is interpreted as showing increased confidence in Theresa May's leadership, suggesting a reduction in the influence of the far right within the party, and therefore more likely to deliver a pragmatic rather than ideologically driven Brexit solution.
A Labour landslide would be negative for Sterling, according to TD Securities.
"While polls have consistently been pointing toward big Labour wins/Conservative losses at next week's local elections, with GBP being vulnerable to political developments, we may see a negative market reaction to any "Labour landslide" headlines. Vote counting only begins on Friday, so results should trickle out later that day," say TD Securities.
It is not unusual for voters to use the local elections to express dissatisfaction with the reigning government so a labour victory would not be particularly surprising or necessarily especially indicative of future voting patterns.
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