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GBP/INR Threatens Major Trendline, More Losses are Likely

© Hemant, Adobe Stock

- GBP/INR threatens to pierce major trendline support.

- Exchange rate likely to break support and slide lower.

- Brexit uncertainty drives GBP, falling oil supports INR.

GBP/INR has fallen to 89.63, a far cry from its 98.50 October highs (and 2018 highs), and is likely to decline even further in during the days ahead.

The new short-term downtrend continues to unfold, fuelled by a fall in oil prices and increasing uncertainty about how the U.K. will exit the European Union. The pair is now threatening a major trendline. 

If the bears are successful in pushing the market below the trendline, the rate could fall as low as 85.00 Rupees to the Pound, according to Pound Sterling Live technical analysis.

Above: Pound-to-Rupee Rate, with trendline, shown at weekly intervals.

The 50 and 200-week moving averages (MA), as well as the trendline, are located in the 90-91 region. All of these look to have been breached although a short-term retracement or even a reversal of the trend is still a risk.

Arguably, some formidable support still lies in the way of further losses, so we look for a daily close (UK time) below 89.50 to confirm a continuation of the bearish trend.

A confirmed break would see the market target the 88.00 the August lows in the first instance, followed by 86.60, which is the 61.8% fibonacci extension of the move prior to the trendline. 

That would lead the market toward our final downside target of 85.00. 

Above: Pound-to-Rupee rate, with trendline, shown at daily intervals.

The Pound has weakened of late because it has now dawned on markets that Prime Minister Theresa May’s Brexit deal probably will not gain parliamentary approval.

Parliament must vote with a majority for May's Withdrawal Agreement to be made law and brought into force. Without its ratification, the UK could find itself leaving the EU without any deal at all. 

The Prime Minister is 60 votes short of a majority, according to Sky News, although The Sun says she could face a crushing 200 vote defeat when bill comes before the House of Commons in December.

A further weight on Sterling has come from Bank of England (BoE) forecasts of how a worst-case scenario ‘no-deal’ Brexit would hit the economy. They paints a bleak picture, with a significant hit to growth over subsequent years, a doubling of unemployment and house price declines of up to 30%.

The government also published its forecasts Wednesday, which showed how different types of a Brexit might impact the economy. These also suggest a ‘no-deal’ would have the worst impact, but that all kinds of full or partial exit from the EU would result in lower growth compared to if the UK stayed in the EU.

The Rupee, meanwhile, has recovered from earlier losses due to a fall in oil prices. Crude oil is the country’s biggest import so fluctuations in the price impact on the balance of payments and inflation, which then effect the Rupee.

A major risk event on the horizon is the Organization of Petroleum Exporting Countries (OPEC) meeting next week, which could see Rupee weakness return if the cartel decides to sharply reduce production in order to push up prices.

“Oil prices were up this morning ahead of the OPEC meeting next week when the market expects it to cut supply. Oil prices also found support from the shutdown of Britain's largest North Sea oilfield being closed for repairs,” says Zaakirah Ismail, a strategist at Standard Bank.

Oil-related pressures could be partly offset by increasing foreign capital inflows, as investors previously spooked away from emerging markets by the Turkish Lira crisis return for another ‘bite of the Indian cherry’ by renewing investment in the subcontinent’s assets.

“There should be savings of more than $15 billion on current-account-deficit on a rolling one-year basis due to the recent fall in oil prices. This and the change in EM sentiment globally have resulted in a resumption of foreign capital flows,” says B Prasanna, head of markets at ICICI Bank, in an interview with The Economic Times of India. Prasanna is cautiously optimistic about the Rupee.

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