The Indian Rupee Faces Continued Pressure Against the US Dollar
On Friday, the Indian Rupee (INR) continued to struggle against the US Dollar (USD), marking its fourth consecutive day of decline. The USD/INR pair opened at approximately 95.80, reflecting expectations of a weak start for the Indian currency. This downturn came after the US saw substantial gains overnight, driven by stronger-than-expected Producer Price Index (PPI) data for August, which has heightened expectations for further interest rate hikes by the Federal Reserve (Fed).
Currently, the US Dollar Index (DXY), which measures the strength of the dollar against six major currencies, is trading close to Thursday’s peak at about 99.20.
Robust US PPI Data Fuels Fed Rate Hike Speculation
The PPI report released on Thursday indicated that the headline producer inflation rose to 5.4% year-on-year (YoY), slightly above the anticipated 5.3% and up from July’s 4.8%. Similarly, the core PPI, which excludes food and energy prices, increased to 4.6% YoY, meeting expectations and higher than the previous 4.3%.
These strong PPI figures have led to increased speculation of an interest rate hike by the Fed. According to the CME FedWatch tool, the likelihood of the Fed raising rates in their upcoming policy meeting has jumped to 72.4%, up from 61.2% prior to the data release.
Typically, heightened Fed rate hike expectations push US Treasury Yields higher, impacting the attractiveness of riskier investments. As of now, 10-year US Treasury Yields have reached a notable 4.98%, marking their highest since November 2023.
Investors Brace for US Consumer Price Index (CPI) Report
With the PPI data in mind, investors are now focused on the upcoming Consumer Price Index (CPI) report for August, set to be released at 12:30 GMT. Economists from TD Securities predict that while US price pressures may have eased slightly, they anticipate the core CPI will rise by 2.3% on a year-over-year basis, down just 10 basis points from July. They also suggest that headline inflation could stay flat at 3.4% YoY. However, they caution that risks may lean toward a higher outcome if significant price declines in certain tariff-exposed goods do not occur.
India’s CPI Data Could Impact the Rupee
In India, the upcoming retail CPI data for August, expected on Monday, may serve as a crucial factor for the Indian Rupee’s performance. Economists at Societe Generale forecast that India’s inflation could rise to about 4.8% YoY in August, increasing from July’s 4.4%. If accurate, this would signify the third month in a row of inflation exceeding the Reserve Bank of India’s (RBI) 4.0% target, suggesting inflationary pressures are becoming more widespread.
Societe Generale notes that food inflation is likely a leading contributor, potentially surpassing 6.0% YoY in August, driven by rising costs for sugar, cereals, dairy products, and selected vegetables. Additionally, fuel inflation is expected to exert upward pressure due to high global energy prices and prior domestic price increases, further impacting consumer prices.
The bank’s analysis indicates that if India’s CPI rises to around 4.8% YoY, it would prompt concerns regarding broadening inflation dynamics beyond just a few categories.
USD/INR Technical Overview
From a technical standpoint, the USD/INR is trading at 95.80, showing a bullish trend as it remains above the 20-day exponential moving average (EMA) at 95.22. The pair has bounced back nicely from late-August lows, and current momentum suggests potential for further gains. Initial support is seen at the 20-day EMA, where buying interest may emerge. Looking ahead, the pair could possibly climb towards the all-time high near 97.10.
In summary, the Indian Rupee is experiencing downward pressure, influenced by US economic data and domestic inflation indicators, making the upcoming CPI report a key focus for investors.
