USD/INR posts modest gains amid geopolitical risks

• The Indian Rupee edges lower in Tuesday’s early European trading hours. 
• Outflows from Indian equities, higher oil prices and a stronger US Dollar undermine the INR. 
• Traders await Fedspeak ahead of the RBI rate decision. 

The Indian Rupee (INR) weakens on Tuesday amid the selling pressure from foreign funds and weak tone in the domestic markets. Additionally, the rise in crude oil prices and escalating geopolitical tensions between Israel and Iran contribute to the INR’s downside. 

Traders will keep an eye on the speeches from the US Federal Reserve’s (Fed) Raphael Bostic, Phillip Jefferson and Susan Collins on Tuesday. Any dovish comments from the Fed officials could weigh on the Greenback and cap the downside for the local currency. On Wednesday, the Reserve Bank of India (RBI) interest rate decision will take center stage. 

Daily Digest Market Movers: Indian Rupee looks fragile amid global challenges

• "We expect the rupee to trade with a negative bias on selling pressure from foreign funds and a weak tone in the domestic markets. Escalating tensions between Israel and Iran may further pressurize the rupee," said Anuj Choudhary, Research Analyst at Sharekhan by BNP Paribas.
• India's foreign exchange reserves rose $12.588 billion to a new all-time high of $704.885 billion for the week ended September 27, the Reserve Bank of India said on Friday. 
• India's Trade Minister Piyush Goyal said on Monday it is time for the INR to appreciate on the back of inflows in debt and equity markets.
• Federal Reserve Bank of St. Louis President Alberto Musalem stated on Monday that he supports more interest rate cuts as the economy moves forward on a healthy path. However, he emphasized that it is appropriate for the Fed to be cautious and not overdo easing monetary policy, per Reuters.
• Minneapolis Fed President Neel Kashkari said on Monday that the Fed welcomed the strong September jobs report, which indicates the firm economy. Kashkari added that the balance of risks shifted from "high inflation towards maybe higher unemployment.

Technical Analysis: USD/INR’s constructive outlook prevails 

The Indian Rupee trades weaker on the day. The positive picture of the USD/INR pair remains intact, with the pair holding above the key 100-day Exponential Moving Average (EMA) on the daily timeframe. The further upside looks favorable as the 14-day Relative Strength Index (RSI) is located above the midline near 60.70.  

The upper boundary of the rectangle and psychological mark near 84.00 act as a key resistance level for USD/INR. Any follow-through buying above this level could attract some buyers to the all-time high of 84.15, followed by 84.50. 

On the downside, the first downside target to watch is 83.80, the low of October 1. Sustained bearish momentum could pave the way to the 100-day EMA at 83.66. The next contention level is seen at 83.00, representing the round mark and the low of May 24. 

Fed FAQs

What does the Federal Reserve do, how does it impact the US Dollar?

Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.

How often does the Fed hold monetary policy meetings?

The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.

What is Quantitative Easing (QE) and how does it impact USD?

In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.

What is Quantitative Tightening (QT) and how does it impact the US Dollar?

Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.

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