Welcome to our daily pre-market update, where we comprehensively analyze the Indian rupee’s performance in the currency markets. In this article, we will delve into the previous day’s trading session, examining the critical movements of the rupee against major currencies such as the US dollar (USD), British pound (GBP), Euro (EUR), and Japanese yen (JPY). Additionally, we will offer insights into what we can expect from the rupee in today’s trading session.
Date- July 28, 2023
Place- New Delhi, India
USDINR
The recent press conference held by the European Central Bank (ECB) had a notable impact on currency markets, particularly on the US Dollar Index via EURUSD and the offshore USDINR, resulting in an eventful night for traders. The ECB’s stance, characterized as dovish, caused a significant decline in the EURUSD, leading to a general drop in most major currencies against the USD. Currently, the offshore USDINR is trading near the 82.30 levels based on spot reference.
Adding to the market dynamics, the United States released its second-quarter GDP estimates following the ECB policy announcement. Surprisingly, the GDP growth for the second quarter exceeded expectations, registering 2.4% compared to the consensus forecast of 1.8%. The strong performance was primarily driven by robust consumer spending and investment. However, there was a slowdown in the core PCE price deflator, which indicates a deceleration in inflation, dropping to an annualized rate of 3.8% from the previous 4.9% (consensus 4%). Additionally, unemployment claims declined more than anticipated, and durable goods orders increased beyond expectations, significantly impacting the US Dollar. As a result, the US Dollar Index experienced a surge.
Today, it is anticipated that USDINR will open higher, near the 82.30 level, and is expected to continue trading with an upward bias. This current situation brings to mind the short covering rally that occurred between 3rd July and 7th July, during which USD INR surged from a low of 81.75 to 82.76, mainly driven by short covering. Traders are cautioned to exercise patience and wait for a potential pullback before considering new positions, as there is a risk of intervention by the Reserve Bank of India (RBI). However, if no intervention occurs, there is a possibility of a short covering rally that could drive USDINR towards the 82.60/75 zone on the spot. Key support levels are identified between 82.10/15 and 82.00/03.
GBPINR
Today, there is an anticipation of a considerable gap down opening for GBPINR, with a likely level near 105.30 on the August futures. This drop is primarily attributed to the sharp rally observed in the US Dollar Index following the recent ECB policy announcement, coupled with the release of unexpectedly strong US economic data. As a consequence, it is expected that GBPUSD will experience further declines, potentially reaching the 1.2670/90 zone. Consequently, GBPINR is also projected to be dragged down, with levels possibly reaching around 104.60 within the next week. Given these factors, the overall bias for the day remains downward. Traders should be cautious and mindful of the potential downward movement in GBPINR as influenced by the mentioned market dynamics.
EURINR
The European Central Bank (ECB) has implemented a notable measure by raising its main policy interest rate by 25 basis points, bringing the deposit interest rate to 3.75%. However, what has garnered even more attention is the shift in the ECB’s approach, as indicated in their policy statement, which now emphasizes a data-dependent approach in determining future interest rate paths. During the press conference, ECB chief Christine Lagarde acknowledged the weaker economic outlook for the eurozone economy in the short term but expressed optimism about a rebound in growth in the medium term.
Lagarde also highlighted that inflation is expected to decrease further, although it will remain above the target for an extended period. This marks a departure from the ECB’s previous approach, which involved raising rates consistently in nearly every meeting. The central bank is now adopting a more cautious stance, taking into account the impact of weak economic sentiment indicators and credit surveys before making further decisions.
This shift in the ECB’s approach had a significant impact on EUR pairs, leading traders to sell off the Euro. Consequently, EURINR is anticipated to open lower, likely around 90.40 levels, with a decline of almost one rupee. The bias for EURINR is expected to remain downward, and there may be further losses observed in the coming week. Traders should be attentive to these developments as they can influence the dynamics of EURINR trading in the short to medium term.
JPYINR
In the past week, we have been advising our readers to approach the Bank of Japan (BOJ) meeting with caution due to the BOJ’s history of providing misleading information before policy decisions. Initially, traders were confident that the BOJ would maintain its yield curve control (YCC) policy without making any adjustments. However, there is now growing speculation that the BOJ may actually make some tweaks to its policy during today’s meeting.
Under the YCC framework, the BOJ’s objective is to target short-term interest rates at -0.1% and keep the 10-year government bond yield around 0%, with a tolerance band of 0.5% above and below the target. To achieve these rates, the BOJ employs unlimited bond buying or quantitative easing (QE). This unconventional policy approach has contributed to making the Japanese Yen one of the weakest currencies globally, setting it apart from the strategies adopted by other central banks.
If the BOJ decides to raise the upper cap on yields in today’s meeting, it could potentially trigger a sharp rally in JPYINR, the Japanese Yen against the Indian Rupee, while also negatively impacting equity markets due to the unwinding of the JPY carry trade. Therefore, day traders are strongly advised to closely monitor JPYINR today, as significant volatility is expected.
In a nutshell, it is essential to remain vigilant and prepared for any unexpected policy changes from the BOJ, as they have demonstrated a willingness to surprise markets in the past. Traders and investors should exercise caution and stay informed about the developments during and after the BOJ meeting to adjust their strategies accordingly.
Disclaimer
CurrencyVeda provides information purely for educational purposes. We are not financial advisors or brokers. The content we provide should not be taken as financial advice or a recommendation to buy or sell any sort of investment or security. Always perform your own due diligence and consult with a licensed professional before making any investment decision.
