The Indian rupee plunged to a record low against the US dollar today, September 11, as concerns about the US and Indian trade relations remained. The USD/INR pair soared to a high of 88.52, continuing a trend that has been going on since it bottomed at 83.83 in April. 

Fundamentals point to an Indian rupee rebound

The main reason why the USD/INR exchange rate has surged in the past few months is that relations with the United States have worsened in the past few months.

Donald Trump has implemented a 50% tariff on most goods from India, citing its substantial tariffs on American goods that India charges and its ongoing trade relationship with Russia. 

These tariffs will have some impact on the Indian economy as its companies exported goods worth over $86 billion to the country. India imported goods worth $45 billion, creating  a $46 billion imbalance.

However, investors are likely overreacting as domestic spending is the biggest part of the Indian economy.

And most importantly, Donald Trump and Narendra Modi have recently expressed hopes that they will continue talking and possibly reach an agreement that lowers the levy.

A good example of this is what Trump did with China, when he hiked tariffs to 145%. This led to talks, which resulted in a pause, that has continued to date. In a note, analysts at YES Bank said:

“Indian rupee’s slide past the 88-mark largely reflects US tariff-driven sentiment rather than a deterioration in India’s underlying fundamentals, suggesting limited room for further depreciation.”

US inflation data ahead

The next important catalyst for the USD/INR exchange rate will be the upcoming US consumer price index (CPI), which will provide more clues on what to expect when the Federal Reserve meets next week.

Economists polled by Reuters expect the data to show that the headline Consumer Price Index rose to 2.9%, while the core CPI remained at 3.3%.

Lower numbers than expected will lead to higher chances that the Fed will cut interest rates by 0.50%. In a note, ING analysts said:

“So even if we get an upside surprise to US inflation on Thursday, the Federal Reserve will very likely be cutting interest rates next week and follow up with 25bp moves in October and December.”

Such a move would widen the spread between Indian and US interest rates, creating the case for a carry trade. A carry trade is a situation where investors borrow from a low interest rate currency and invest in a higher-yielding one.

USD/INR technical analysis 

Indian rupee chart | Source: TradingView

The daily timeframe chart shows that the USD/INR exchange rate has been in a strong bullish trend in the past few months, moving from a low of 83.3 in April to 88.5 today.

It recently moved above the important resistance level at 88.18, the highest swing on February 10 this year. This price was the neckline of the inverse head-and-shoulders pattern.

The pair remains above the 50-day and 100-day Exponential Moving Averages (EMA). Also, the Average Directional Index (ADX) has moved to 40, its highest level in weeks and a sign that the trend is strengthening 

Therefore, the pair will likely pull back in the next few days and possibly retest the support at 88.18.

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