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- GBP/INR rebound to be temporary
- More downside forecast eventually
- Rupee to be driven by foreign inflows and oil market
The Pound-to-Rupee exchange rate is trading at 87.70 as we reach the middle of the week, about a third of a Rupee lower than a week ago, with studies of the charts suggesting the pair probably has lower to go.
The pair made new lows and successfully pierced below the ‘neckline’ of a major topping pattern last week. Since then it has recovered back up to the neckline at 87.70 in a possible ‘throwback’ move as shown in the 4-hour chart below:
Throwback moves are recoveries which happen just after a key level or trendline has been broken. They are usually short lived - a temporary pause before the trend continues in the direction of the break.
In this case, it suggests the downtrend will resume eventually, conditional on a break below the June lows established after the initial break happened and bottomed at 87.13. The next downside target, over the short-term, is 86.00.
The 4-hr chart is used for short-term analysis which is defined as the next 1-5 days.
The daily chart meanwhile shows the longer-term downtrend and how the throwback moved back up to the level of the neckline. It also shows the medium-term target at 84.75.
The only difference is the RSI momentum indicator in the lower pane which is converging bullishly with price. This happens when price action makes a new low and momentum fails to corroborate.
On its own, convergence is not enough to suggest a complete reversal of the downtrend, and it may merely signal a period of sideways trading. Eventually, we still expect a break lower to evolve.
We use the daily chart to give us an indication of the medium-term outlook which includes the next week to a month ahead.
On the weekly chart GBP/INR has formed a bearish head and shoulders (H&S) reversal pattern which is very negative sign.
The H&S is composed of three peaks - a head and two shoulders. A break below the neckline triggers the subsequent decline.
A break below the 87.13 lows would probably lead to a sell-off down to 84.75 and then 80.75 in the longer-term.
The second target is roughly equal to the height of the pattern extrapolated lower, the usual method for forecasting follow-through for an H&S.
Only a break above the line drawn from the peak of the pattern connected to its right shoulder at around 91.90 would invalidate the H&S’s bearish potential.
We use the weekly chart to give us an idea of the longer-term outlook, which includes the next few months.
The Fundamental Picture: Rupee Supported by Foreign Investor Flows
The main fundamental drivers of the Rupee - foreign investment inflows and oil - are supporting the currency at the moment.
The currency is likely to strengthen from increased demand as a result of rising demand for Indian shares and bonds from foreign investors, according to analysts at Bank of American Merrill Lynch (BOFAML).
The consensus view is that the recently re-elected Modi government is committed to economic reforms which will be positive for the economy and drive inward investment.
“We believe INR will be a big beneficiary due to the election outcome on the back of resurgence in FDI and portfolio inflows,” says Rohit Garg, emerging asia FI/FX strategist at Bank of America Merrill Lynch. "We believe portfolio inflows are set to resume both on the equity and debt side. A strong and stable government should be positive for equities especially as the government could easily push through easier policies in order to push growth, in our opinion. It is important to remember that most of the negative news around domestic slowdown is out. Hence, while there is little doubt that Indian equities are still expensive when looked through EPS against the backdrop of slow domestic growth, domestic news flow should start turning on the positive side."
India is also in a position to make opportunistic gains from the worsening trade dispute between the U.S. and China, says Garg.
It is both a low-cost manufacturing alternative to China and an agricultural replacement, as an alternative supplier of soybeans to China, for example.
Another major driver of the Rupee is the price of oil which it has to import in vast quantities since it produces very little of its own.
Oil prices recently fell after two oil tankers were attacked in the Gulf of Oman.
Recent data from U.S. oil agencies the API and EIA also indicate rising inventories which is a sign of waning demand.
Brent is currently trading at $61 per barrel and WTI at $53. This is below BOFAML’s 2019 estimate of $70 for Brent, on the basis of which his analysis of the current account deficit being 2.5% of GDP is based (it is currently at -2.3%).