The US dollar maintained its strength against the Indian rupee during Tuesday's Asian session, trading around 96.35, close to its previous all-time high of 96.62. The combination of persistently high international crude oil prices and broad-based dollar strength is putting significant pressure on India's economy, which is heavily reliant on energy imports, leading the rupee to weaken for the tenth consecutive trading day.
International oil prices have been driven higher recently by supply risks in the Middle East. Concerns over tight global crude supply have intensified due to restricted energy transport flows through the Strait of Hormuz. This strait handles approximately 20% of the world's seaborne oil shipments, and any risk of disruption can quickly push up international oil prices.
Currently, WTI crude oil prices are holding above $102 per barrel, having touched $104.74 on Monday, reaching their highest level in nearly two weeks. Although recent statements from the US President suggesting positive progress in negotiations with Iran have temporarily limited further price surges, overall supply concerns persist.
The US President stated that planned military action against Iran had been postponed due to "positive progress" in talks, adding that the likelihood of an agreement was high. Concurrently, the Iranian Foreign Ministry also emphasized that the current focus is on ending regional conflicts and confirmed that related negotiations are ongoing. Despite a temporary easing of geopolitical risks, high oil prices continue to exert significant pressure on the Indian economy. India's heavy dependence on crude oil imports means rising oil prices typically widen the trade deficit, fuel inflation, and weaken the local currency.
To cope with rising energy costs, the Indian government has recently raised petrol and diesel prices multiple times. Data shows that petrol prices in India were increased by approximately 0.87 rupees per liter, while diesel prices rose by about 0.91 rupees per liter. This follows several days of fuel price hikes totaling around 3 rupees per liter. The consecutive increases indicate that high oil prices are gradually translating into domestic inflation.
However, the Indian stock market has recently received support from some foreign capital inflows. Foreign Institutional Investors (FIIs) continued to increase their holdings in the Indian equity market over the past three trading sessions, with a cumulative net purchase of about 43.3 billion rupees. On Monday alone, foreign inflows reached approximately 28.1 billion rupees. The market believes that, despite rising energy costs pressuring corporate profits, India's relatively stable economic growth prospects continue to attract some international capital inflows.
On the dollar front, expectations of high US interest rates continue to support the strength of the US Dollar Index. Recent US inflation data exceeded market expectations, and Federal Reserve officials have consistently issued hawkish signals, keeping US Treasury yields elevated. The 10-year US Treasury yield is currently around 4.60%, near its yearly high of 4.63%. Meanwhile, market expectations for a Fed rate cut this year have significantly cooled. According to the CME FedWatch Tool, the market currently assigns about a 53% probability that the Fed will maintain the current interest rate level by year-end, with the remaining participants even betting on at least one more rate hike within the year.
Driven by the yield advantage of the US dollar, global capital continues to flow into dollar-denominated assets, further boosting upward momentum for the USD/INR pair.
From a technical perspective, the daily chart for USD/INR continues to show a clear uptrend. The exchange rate is currently well above the 20-day Exponential Moving Average (EMA) near 95.07, indicating a solid medium-to-short-term bullish structure. The continued upward slope of the 20-day EMA also suggests the overall uptrend remains intact. The Relative Strength Index (RSI) has risen above 70, entering overbought territory. While this indicates a rapid short-term price increase and potential for a technical correction, the overall momentum remains strong.
The current technical structure suggests that the 20-day EMA near 95.07 forms a crucial dynamic support zone. If the exchange rate experiences a pullback, this area is expected to attract renewed buying interest. A break below this moving average could lead to a further decline towards the previous breakout zone near 94.50. On the upside, as USD/INR approaches its all-time high region, the market is watching the 97.00 psychological level. If oil prices remain high and the dollar stays strong, the probability of USD/INR testing 97.00 is increasing.
Overall, the current movement of USD/INR is primarily driven by a combination of international oil prices, the Middle East situation, Federal Reserve policy expectations, and changes in US dollar yields. In the short term, as long as international oil prices remain elevated, the Indian rupee is likely to stay under pressure.
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