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- GBP/INR rate outlook is turning increasingly bearish
- Head & shoulders pattern on charts at recent highs
- Pound driven by Brexit news; INR in grip of geopolitics
The Pound-to-Rupee rate was trading around 90.91 Monday after having closed the previous week relatively unchanged, after strenth in Sterling was offset by a recovery of the Indian Rupee, although technical factors mean the outlook is becoming increasingly bearish.
Sterling rose against most rivals as a result of the option of a ‘no-deal’ Brexit being taken off the table. UK Parliament first voted to reject Theresa May’s deal again, then rejected the possibility of a hard-Brexit, and finally approved an extension to article 50, which could mean Brexit is delayed.
The Rupee rose last week due to a mixture of factors including increased demand from carry traders seeking assets which provide a relatively higher yield than those in developed markets, and due to optimism about the likely outcome of the general election.
Above: Pound-to-Rupee rate shown at weekly intervals.
The weekly chart gives the clearest signs as to where the exchange rate might be going next. This shows the pair forming a head and shoulders reversal pattern over the last year or more. The pattern is composed of a peak high, which is ‘the head’, and two slightly lower peaks either side that form the shoulders.
A break below the neckline at the base of the pattern, around 88.00, is the confirmation signal for deeper declines that we are looking for. Such a break would probably open up the possibility of a move down to a target in the lower 80.0 area that is equivalent to the height of the pattern extrapolated lower.
The pair is still some way off from the neckline, however, and is currently being supported by the 200-week moving-average in the 90.90 region. This large obstacle must give way before more downside can be expected.
There is a risk of a short bounce when the market first tests 90.0 but assuming the 88 is eventually broken, look for a continuation down to the next target at around 80.00.
The daily chart shows how the key February lows are currently providing support, but if broken would open the door for a move down to 88.00.
Above: Pound-to-Rupee rate shown at daily intervals.
The Indian Rupee: What to Watch
Probably the main fundamental factor influencing the Rupee at the moment is the risk of more conflict between Indian and Pakistan over disputed territory in Kashmir.
An escalation of the conflict would reduce foreign investment in India, harming the Rupee. This has risen recently, supporting the Rupee due to a combination of the authorities relaxing regulation and the relatively high rate of return on offer.
Currently, the enmity between the two nations appears to have eased. At their peak, however, they were threatening to fire missiles at each other.
Another risk factor for the Rupee is political uncertainty from the general elections in April and May. Historically the Rupee has risen before the elections so there is a bias for more gains in the run-up.
As far as the result of the election goes, however, the impact on the currency will be dependent on the market’s assessment of the new government's policies. According to polls, it is not certain Prime Minister Modi’s NDA party will return another majority so he may have to share power with a coalition partner.
The Modi government has been seen as mostly beneficial for the economy due to its modernisation and reform-oriented agenda. If the result looks like ending Modi’s reign or severely curb his ability to continue with his plans, however, it may weigh on the Rupee.
On the hard data front, the main release is the current account in Q4 at 12.00 GMT on Tuesday. The deficit deepened to a historic low of $-19.1bn in Q3. If the deficit deepens any further in Q4 it will weigh on the Rupee.
Above: Indian current account deficit. Source: Tradingeconomics.com.
The Pound: What to Watch
The main fundamental driver for the Pound in the week ahead is probably developments in the Brexit process, with the Bank of England (BOE) meeting on Thursday also likely to cause volatility.
It is highly likely that the government will try, for the third time, to get its Brexit deal approved by Parliament, or failing that, that the EU will require a lengthy delay of article 50.
The latest reports from Brussels are suggesting the EU may try to make a delay conditional on either the UK having a second referendum, a general election or a very firm plan.
It is suggested this may focus minds, especially amongst Brexiteers who could fear a hijacking of Brexit if there is a delay. This will put pressure on them to accept the government’s negotiated deal.
The two most likely scenarios, therefore, are that Theresa May’s deal finally gets approved on a third attempt, or that Brexit is delayed on the condition of a referendum or general election being held.
Both would be very positive for the Pound, which compliments the overall bullish technical outlook.
The BOE meeting on Thursday, at 12.00 GMT, could also impact on Sterling. There is a risk the BOE may change its statement to reflect the recent slowdown in the economy. If so the Pound is likely to suffer.
Up until now, it had been assumed Brexit risks were the only thing stopping the BOE from raising interest rates, but the slowing economy may be providing them with other reasons not to.
“The economy has no doubt slowed but the Bank seems unwilling to shift to a more dovish stance, reasoning that it should just be patient for now as an ‘orderly’ Brexit outcome can dispel much of the uncertainty by itself and hence, kickstart investment and growth. Overall, the BoE is unlikely to deviate much from this stance, but if there is any change, it’ll probably be towards a more cautious bias,” says Raffi Boyadjian, an economist at XM.com.
From a purely hard data perspective, the main releases are employment data out on Tuesday, inflation data out on Wednesday and retail sales on Thursday.
Labour market data is expected to continue showing signs of strength, when released on Tuesday at 9.30. The unemployment claimant count is expected to have risen by only 2.7k in February - a relatively low count - the unemployment rate is forecast to be stuck at a historic low of 4.0% in January, and overall payroll count to have risen by 120k in December, according to the market consensus.
More important for Sterling, perhaps, is average earnings in January, since this has more influence over Bank of England (BOE) policy.
If average earnings rise more than the 3.4% in January (3.2% including bonuses) that is forecast, inflation will probably rise and so will interest rates - with expectations increasing that the BOE will raise them, and this will drive Sterling higher. Higher interest rates are positive for the Pound because they attract and keep greater inflows of foreign capital.
Inflation is out on Wednesday and is another key metric for the Pound. As explained above inflation influences BOE policy which impacts on the currency. In January inflation came out surprisingly lower after falling -0.8% compared to December. If inflation is also shown to be negative in February it could really drive down the Pound. Current expectations, however, are for a 0.2% rise.
Thursday sees another major data release, in the form of retail sales in February, out at 9.30. This is forecast to show a -0.3% fall from 1.0% previously. A deeper-than-expected decline, however, could trigger more weakness for Sterling.
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