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Heavy Resistance Thwarting Pound's 2019 Advance vs. Indian Rupee

 

- GBP/INR in uptrend after bounce from new year lows

- Major resistance up ahead could cap gains

- Brexit vote to move Pound; Rupee to look to oil price

The Pound-to-Rupee rate is trading at 90.90 at the start of the new trading week, after rebounding over 2.0% in the previous week.

GBP to INR weekly chart

2019 has seen a short-term rebound establish, with gains coming off multi-month GBP/INR lows at 87.63. The recovery presents a challenge to the authority of the established medium-term downtrend which has been in place ever since the October 2018 peak rolled over.

GBP to INR daily

On a very short-term basis, it appears to have successfully reversed and a new uptrend has been established, which, given the old adage that the ‘trend is your friend’ gives the chart a bullish bias - but with important provisos.

GBP to INR 4 hour

Normally this short-term uptrend would be expected to continue rising, however, there are key resistance levels blocking the path higher, which mean the outlook is not as bullishly clear-cut as might be.

GBP to INR

One such obstacle is the 50-month moving average (MA) which is supplying a tough ceiling at the current highs (91.08). This is likely to be a difficult level to break above as MA’s attract short-term technical traders who seek to fade the trend and profit from the expected pull-back.

But that is not the only obstacle - and even if it were it would still be formidable; in addition, there is the 50 and 200-week MAs at 91.26 and 90.73 respectively, also acting as tough ceilings against which bulls could ‘break their backs’.

Although the 200-week has arguably now been broken, after the pair managed to close above it on a weekly basis, the 50-week has not and remains a barrier to growth.

Another extremely bearish sign on the monthly chart is the pivot swing at the October highs. This occurs when the exchange rate revolves around a new high over a three month period.

If the move down in the third month shows more velocity than the rise in the first month, as is the case for GBP/INR it strongly suggests a reversal. This is often a reliable medium-term bearish indicator.

The 200-day MA is also an impediment on the daily chart, situated at the key 91.60 level.

This is also the level of the peak of the last higher low before the pair based on January 3, and therefore, holds a special structural significance.

It is normally seen as the last bastion against the new bull-trend and if it were broken on a closing basis would turn the odds much more in favour of a reversal higher. The location of the 200-day at almost the exact same level poses a further obstacle for bulls to traverse to ensure the new trend prospers.

Ultimately to seal the deal of the new uptrend a break clearly above this important watershed level is necessary. Such a break would be confirmed by a break above the 92.00 level, and lead to a probable move up to a target at 93.00.

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The Indian Rupee: What to Watch

The main data release for the Indian Rupee is inflation data from December, which has already just been published on Monday morning.

The data has shown headline inflation rise at a slower pace of only 2.19% in December, only marginally below the 2.2% expected. This is lower than November’s 2.33%.

The main reason for the fall was volatility in food prices which fell by -2.51% after a record -2.6% decline in November.

The lower headline inflation reflected a fall in wholesale inflation data out at the same time.

This showed wholesale food inflation falling by - 0.07%, whilst all the other gauges rose, including the broad wholesale goods index, which increased by 3.8%.

The more depressed inflation rate is as a result of a slow-down in the country’s industrial base. It is expected to lead the Bank of India (BOI) to cut interest rates at its January meeting according to commentators. This could weigh on the Rupee too.

“India’s wholesale inflation eased to an eight-month low in December, strengthening views among some economists the central bank could ease its monetary policy stance next month as the country faces a slowdown in manufacturing,” says Manoj Kumar, a correspondent for Reuters.

The other main driver of the Rupee is the price of oil, which has been recovering from its December lows recently, as a result of the impact of supply cuts announced by OPEC. If the trend continues and oil recovers further it will produce a headwind for the Rupee.

India has to import almost all its fuel which is why the cost of crude can impact on the supply of Rupees in the market and therefore, the value of the currency.

 

The Pound: A Big Week for Brexit Politics

By far the most important event in the week ahead is the vote on Theresa May’s Brexit deal, scheduled for Tuesday 15, at 19.00 GMT. The outlook definitely favours the government to lose, and it is more a question of ‘by how much’ rather than ‘whether’.

The Pound's reaction will therefore likely depend on the size of the loss, and what comes next. If the loss is large - defined by a 100 or more MPs - as some analysts believe, it might signal the death of the government’s deal and could prompt a knee-jerk move lower in Sterling.

"Very few commentators expect the deal to pass, so the move in GBP would likely be limited on that news alone," says Jordan Rochester, analyst with Nomura. "But we would be looking at the size of the defeat to understand whether a repeated vote could get over the line."

The expected defeat would probably lead to a vote of no-confidence in the government, called by the Labour Party with Labour leader Jeremy Corbyn telling the BBC's Andrew Marr on Sunday that he would call the vote soon. But we don't see the government losing such a vote as the DUP and Conservative party would unite to defend their hold on power.

"We’d expect the government to win a vote of no confidence as turkeys rarely vote for Christmas," says Nomura's Rochester.

We think the government will ultimately rework the Brexit deal and bring it back to parliament for a second airing, and there is talk of some EU concessions being made available to help the deal cross the line on a second vote.

While there is a majority in Parliament who are committed to avoiding a 'no deal' Brexit, as proven by last week’s finance bill vote, there is not necessarily a majority to command an alternative plan. That said, a report in the Sunday Times reports Downing Street uncovered a bombshell plot by senior MPs to seize control of Brexit negotiations and sideline the prime minister. At least two groups of rebel MPs are plotting to change Commons rules so motions proposed by backbenchers take precedence over government business, upending the centuries-old relationship between executive and legislature.

This in effect could see Brexit delayed, cancelled or another Norway-style Brexit delivered. All scenarios lead to a softer Brexit which is good for Sterling. However we would be seriously worried for the long-term stability of UK politics if such a coup were to take place. 

Last week's reports that a large portion of Labour Party MPs are open to supporting the deal if they can secure their own changes is a significant shift in the debate we believe: if these MPs secure some changes to the deal, a softer Brexit is in sight, which represents an all-out positive for Sterling.

Last week's report the government is considering a delay to the Article 50 process is also notable in that it suggests government ministers are aware that all alternative Brexit scenarios that would follow the failure of May's deal, would need more time to formulate and execute. While the reports were officially denied by 10 Downing Street we believe this a case of where there is smoke, there is fire.

“Perhaps the best-case scenario for the Pound, barring the deal passing in parliament, would be a delay to the article 50 process. This decision would have to be agreed by the EU, however they are likely to do so, with the Pound set to appreciate due to the removal of the pressure of hitting the 29th March deadline for exiting the EU,” says Michael Brown, Senior Analyst at Caxton FX.

Brexit aside, the two main economic releases in the week ahead are inflation out on Wednesday and retail sales on Friday. Of the two, analysts think the latter is most likely to have the greater impact on Sterling.

“With the Bank of England not expected to raise interest rates unless Parliament approves a smooth Brexit, the inflation data is unlikely to have much impact in currency markets. Retail sales on the other hand could see a stronger response by traders as it’s a better gauge of UK growth momentum,” says Raffi Boyadjian, an analyst at broker XM.com.

Retail sales are forecast to show a -0.7% fall in December according to consensus estimates. If so the Pound could fall due to a drop in expected Q4 growth.

Wednesday’s inflation data, meanwhile, is expected to show a rise of 0.2% month-on-month (Mom) and 2.2% compared to a year ago, when it is released at 9.30, with little changed from the previous print. The higher the result the better for the Pound and vice-versa.

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