USD/INR declines as Indian Rupee strengthens, US inflation hogs limelight

• The Indian Rupee bounces back against the US Dollar as the latter ticks down ahead of US CPI data for June.
• Investors expect the US inflation to have grown at a faster pace.
• Soft Indian inflation data for June boosts hopes of more cuts in the RBI’s Repo Rate.

The Indian Rupee (INR) rebounds sharply against the US Dollar (USD) on Tuesday, sending the USD/INR pair lower to near 85.85 during the European trading session. The pair declines as the Indian Rupee trades firmly despite soft India’s Consumer Price Index (CPI) data for June on year has prompted hopes of further monetary policy easing by the Reserve Bank of India (RBI) this year.

Meanwhile, the US Dollar ticks lower ahead of the United States (US) Consumer Price Index (CPI) data for June, which will be published at 12:30 GMT.

At the time of writing, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, edges down but still trades close to the three-week high around 98.00.

Investors will closely monitor the CPI data as it will demonstrate the impact of sectoral tariffs on inflation. So far, US President Donald Trump has imposed 25% tariffs on imports of automobiles and auto components, and 50% on steel and aluminum. He has also announced a 50% additional import duty on copper, which will become effective from August 1.

As measured by the CPI, the US headline inflation is expected to have grown by 2.7% on year, faster than 2.4% in May. In the same period, the core CPI – which excludes volatile food and energy prices – rose at a faster pace of 3%, compared to the prior release of 2.8%. On month, both headline and the core CPI are estimated to have risen 0.3%, faster than the former reading of 0.1%.

Signs of accelerating price pressures would discourage Federal Reserve (Fed) officials from arguing in favor of reducing interest rates in the near term. This would be in contrast with US President Trump’s ambitions, who has criticized the Fed, especially Chairman Jerome Powell, for not bringing interest rates down.

On Monday, US President Trump criticized Fed Powell again for maintaining a restrictive monetary policy stance, stating that the interest rates should be reduced to 1% or below. We have a bad Fed chairman, really bad,” Trump said at the White House and added, “We should be at 1%. We should be less than 1%,” Fox Business reported. 

Daily digest market moves: Indian Rupee gains despite soft India CPI data for June

• The Indian Rupee attracts bids even as inflationary pressures in India have cooled down. India’s Ministry of Statistics and Programme Implementation reported on Monday that the headline inflation grew moderately by 2.1%, compared to estimates of 2.5% and 2.82% recorded in May. This was the lowest figure seen in over six years.
• According to the CPI report, a sharp decline in food inflation due to widespread monsoon contributed significantly to cooling price pressures. Meanwhile, the Wholesale Price Index (WPI) Inflation, which indicates change in price pressure at the producer level, fell into the negative territory. This also increased confidence in price pressures cooling down, paving the way for more interest rate cuts by the RBI this year.
• In the June meeting, the RBI front-loaded interest rate cuts by lowering the Repo Rate surprisingly by 50 basis points (bps) to 5.5% and reducing the Cash Reserve Ratio (CRR) by 100 bps to 3%.
• Meanwhile, uncertainty surrounding the trade agreement between the US and India is expected to keep the Indian Rupee on the back foot. A report from Bloomberg released over the weekend stating that Washington will not send the letter to India, specifying reciprocal tariff rates, which he has dispatched to 22 nations yet, notably Japan, Canada, Mexico, South Korea and the European Union (EU) increased investors’ confidence that both nations could sign a trade pact before the August 1 deadline.

Technical Analysis: USD/INR struggles to stabilize above 86.00

USD/INR falls slightly on Tuesday to near 85.90, a level that coincides with the 20-day Exponential Moving Average (EMA). The pair struggles to extend its upside above the fresh three-week high of 86.16 posted on Monday.

The 14-day Relative Strength Index (RSI) oscillates inside the 40.00-60.00 range, suggesting that the asset lacks momentum on either side.

Looking down, the May 27 low of 85.10 will act as key support for the major. On the upside, the June 24 low at 86.42 will be a critical hurdle for the pair.