The Indian rupee (INR) weakened during Tuesday’s early European session, but foreign inflows and a drop in crude oil prices may provide support. Later today, all eyes will be on the US ISM Manufacturing PMI, which could shake the US dollar.
USD recovers but Indian rupee may be supported
While the INR weakened on Tuesday after the recovery of the USD, the positive Indian equity market, the influx of foreign funds and a drop in crude oil prices may limit the INR’s losses. At the same time, demand for the US dollar remains strong as safe-haven flows ahead of the crucial US labour market data could weigh on the INR.
Indian Rupee is a sensitive currency to external factors
The Indian rupee is very sensitive to external factors, such as crude oil prices, the US dollar and foreign investment. The INR is influenced by the price of crude oil because India depends on imported oil, while the value of the US dollar can also move the rupee as most trade is conducted in USD.
Additionally, the country’s Reserve Bank of India (RBI) very often intervenes directly in FX markets to keep the exchange rate stable, while the level of interest rates set by the RBI can also influence the exchange rate of the INR.
INR finds support from central bank intervention
Losses for the Indian rupee may also be limited due to the central bank’s recent and repeated intervention at current levels.
The Reserve Bank of India has on different occasions during August intervened near the current levels to prevent the rupee from falling below 84. Due to the RBI’s active intervention, the rupee has been among the least volatile Asian currencies, and if the rupee stays within a narrow band, not much will happen, analysts have argued.
Indian and US data to watch
The HSBC India Manufacturing Purchasing Managers Index (PMI) fell to a three-month low at 57.5 in August, below expectations and lower than the previous reading of 57.9. Chief India economist at HSBC, Pranjul Bhandari, explained that new orders and output reflected the headline trend, and that for many, the slowdown was the result of strong competition.
HSBC India Services PMI is expected to improve to 60.4 in August from July’s 60.3 reading.
On the USD front, traders will focus on the release of the US ISM Manufacturing Purchasing Managers Index (PMI) later on Tuesday and ahead of the Indian August HSBC Services PMI. The US ISM Manufacturing PMI for August is estimated to come in at 47.5 in August, up from the previous reading of 46.8. Services PMI is anticipated to fall to 51.1 in August from July’s 51.4 figure.
On Friday, all eyes will be on the Nonfarm Payrolls (NFP), Unemployment Rate and Average Hourly Earnings for August. Following the Federal Reserve (Fed) Chair Jerome Powell’s comments at Jackson Hole last month, this Friday’s NFP report will be closely watched and, if data disappoints, market pricing for a larger rate cut may increase and could weigh on the USD.
The market has currently priced in an almost 69% chance of the Fed delivering a 25 basis points (bps) rate cut in September, according to the CME FedWatch tool.