USD/INR Extends Recovery as US Dollar Strength and Geopolitical Concerns Propel the Pair

Indian Rupee

Date: June 5, 2023

Place: New Delhi, India

In today’s European session, the USD/INR pair continues its upward trajectory, reaching around 82.50, as the Indian Rupee (INR) applauds the strength of the US Dollar. The recovery is attributed to a combination of factors, including downbeat sentiment, firmer Crude Oil prices, and the upcoming Reserve Bank of India (RBI) Monetary Policy Meeting scheduled for Thursday.

One of the driving forces behind the USD/INR recovery is the divergence in monetary policies between the Federal Reserve (Fed) and the RBI. This divergence arises from recent economic data streams from the United States and India, highlighting the US economy’s relative strength. As a result, the USD/INR pair remains robust, supported by the expectation of a tightening monetary stance by the Fed.

Furthermore, the recent surge in WTI Crude Oil prices and prevailing risk-off sentiment, fueled by concerns over the ongoing US-China trade dispute and the Russia-Ukraine conflict, contribute to the strength of the USD/INR pair. Investors tend to favor safe-haven assets, including the US Dollar, during periods of geopolitical uncertainty, leading to increased demand.

On the US front, the release of the Non-Farm Payrolls (NFP) data on Friday further bolstered expectations for a 0.25% rate hike by the Fed in June, while simultaneously reducing the likelihood of a rate cut in 2023. This positive data boosted the US Dollar Index (DXY) and prompted a corrective bounce in US Treasury bond yields.

Simultaneously, the market sentiment remains dampened by concerns surrounding geopolitical tensions involving China, Russia, Ukraine, and the United States. These worries, combined with uncertainty about the RBI’s monetary policy stance, mainly driven by India’s softening growth and favorable inflation, continue to drive the USD/INR price higher.

Against this backdrop, the recovery of US 10-year and two-year Treasury bond yields, which had experienced a three-week downtrend, brings relief to investors. However, the S&P500 Futures indicate a mild risk-off sentiment as it retreats from its highest levels since August 2022. The strength of the US Dollar Index (DXY) benefits from this risk-off mood, with market participants eagerly awaiting the release of US Factory Orders and ISM Services PMI for May.

Looking ahead, the key event to watch for USD/INR pair watchers is Thursday’s RBI Interest Rate Decision. The market will closely monitor the RBI’s policy stance, which will undoubtedly influence the future trajectory of the USD/INR pair.

As the week progresses, geopolitical developments and economic indicators from both the United States and India will continue to shape the currency pair’s performance. Traders and investors will remain vigilant, assessing the evolving landscape to make informed decisions in the dynamic USD/INR market.