USD/INR gathers strength as hotter US CPI, hawkish Fed boost the US Dollar

• The Indian Rupee edges lower in Friday’s Asian session. 
• Indian foreign outflows, rising crude oil prices weigh on the INR; likely RBI’s intervention might cap its downside. 
• The US PPI and preliminary reading of the Michigan Consumer Sentiment Index data will be the highlights on Friday. 

The Indian Rupee (INR) weakens on Friday amid the firmer US Dollar (USD). Furthermore, sustained Indian foreign fund outflows and elevated crude oil prices continue to undermine the local currency. The hotter-than-expected US inflation data and hawkish comments by Federal Reserve (Fed) officials lift the Greenback and also contribute to the INR’s downside. 

Nonetheless, the possible foreign exchange intervention from the Reserve Bank of India (RBI) helps limit the INR’s losses. Looking ahead, market players will shift their attention to the US Producer Price Index (PPI) for September, along with the preliminary reading of the Michigan Consumer Sentiment Index for October. On the Indian docket, the Industrial Production and Manufacturing Output will be released on Friday. 

Daily Digest Market Movers: Indian Rupee remains sensitive to multiple headwinds 

• FTSE Russell said on Tuesday that Indian sovereign bonds will be added to its Emerging Markets Government Bond Index (EMGBI), following a similar move by JP Morgan and Bloomberg Index Services.
• The US Consumer Price Index (CPI) for September rose by 2.4% YoY, compared to 2.5% in August, exceeding estimates of 2.3%. Core CPI climbed by 3.3% YoY in September, surpassing forecasts and August's 3.2%.
• New York Fed President John C. Williams said on Thursday that the monetary policy will continue to shift towards a more neutral stance in the coming months, aligning with ongoing progress toward price stability.  
• Chicago Fed President Austan Goolsbee noted on Thursday that he was not overly concerned with a higher-than-expected September inflation report and stuck by his view that the Fed has moved past its singular focus on price pressures.
• Atlanta Fed President Raphael Bostic stated that the Fed could stand pat at an upcoming policy meeting if the data warrants. "I am totally comfortable with skipping a meeting if the data suggests that's appropriate," said Bostic. 

Technical Analysis: USD/INR maintains the bullish trend in the longer term

The Indian Rupee trades on a softer note on the day. The constructive outlook of the USD/INR pair remains in play as the pair holds above the descending trend line and the key 100-day Exponential Moving Average (EMA) on the daily timeframe. The upward momentum is supported by the 14-day Relative Strength Index (RSI), which stands above the midline near 59.15, supporting the buyers in the near term. 

The 84.00 psychological level acts as a key resistance level for USD/INR. A decisive break above this level could lead the way to the all-time high of 84.15, en route to 84.50. 

On the downside, the initial support level emerges near the resistance-turned-support level at 83.90. The next contention level is located around the 100-day EMA at 83.68. The additional downside filter to watch is 83.00, representing the round mark and the low of May 24. 

Interest rates FAQs

What are interest rates?

Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%. If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.

How do interest rates impact currencies?

Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.

How do interest rates influence the price of Gold?

Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank. If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.

What is the Fed Funds rate?

The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure. Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.

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