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Pound-Rupee Rate's Rally Reaches Key 'Make or Break' Line

Indian Rupee

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- GBP/INR continues to ‘hustle’ higher

- Pair has reached ‘make or break’ level for bulls

- Rupee to be moved by news on fiscal stimulus and risk trends

The Pound-to-Rupee exchange rate is trading at around 88.55 at the time of writing after rising 0.93% in the previous week and studies of the charts suggest a marginal bullish bias.

The 4hr chart - used to determine the short-term outlook, which includes the coming week or next 5 days - shows the pair rising in an established uptrend.

GBP to INR four hour

Given the old adage ‘the trend is your friend’ the pair is likely to go higher.

A break above the 88.33 highs would probably lead to a continuation up to a target at 89.30 initially at the level of the 200-day moving average (MA) where it is likely to stall after encountering tough resistance.

After reaching that level, a tough ‘resistance zone’ begins, incorporating both the MA and a key trendline, and above which the exchange rate must move in order to confirm a more bullish outlook.

A break above the resistance zone at 90.00 would mark a complete long-term reversal of the trend from bearish to bullish and probably the start of a stronger move higher.

In the short-term, such a move would probably reach a target at 91.00.

The daily chart shows the pair rising up in what is probably a new uptrend which is more likely than not going to extend.

Daily GBP to INR

The pair has almost reached the 200-day MA and an important trendline. A break above the trendline would mark an important reversal in the trend.

Such a move would probably rise up to a target at 92.00, possibly even higher, given the significance of the break.

The daily chart is used to give us an indication of the outlook for the medium-term, defined as the next week to a month ahead.

The weekly chart shows the pair rising above the neckline of a large bearish head and shoulders (H&S) pattern which it is now comfortably trading above. This suggests more evidence of a possible reversal of the trend higher.

Weekly GBP to INR

For really strong long-term confirmation of more upside, however, we would want to see a break above the red trendline linking the head and right shoulder. A break above that level would probably lead to a move up to target at 95.00 and kill off all remaining bears.

Alternatively, a break back below the July 30 lows would probably see a continuation down to a target at 80.75, the official target for the H&S based on its height.

The weekly chart is used to give us an indication of the outlook for the long-term, defined as the next few months.

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The Indian Rupee: What to Watch

The main drivers of the Rupee are likely to be government announcements of fiscal stimulus, global risk trends, the strength of the U.S. Dollar, and Indian inflation data out on Thursday.

One potentially positive factor for the Rupee is that the government is expected to announce some more growth-inducing measures, especially for the real estate sector during the coming week.

"In the truncated coming week, eyes would be focussed on what steps the government will take to revive the economy and how the businesses perform in the festival season," Says Deepak Jasani head of research at HDFC Securities.

The currency may also be supported by an improvement in global risk appetite.

Risk aversion has eased recently after China and the U.S. agreed to trade talks in October and the People’s Bank of China (Pboc) unveiled another stimulus policy aimed at supporting its slowing economy.

These developments have helped the Rupee and other emerging market currencies and weighed on the U.S. Dollar.

The improvement in risk appetite is in line with seasonal trends which show a pattern of risk aversion peaking in late August and early September and then easing.

The seasonal bias appears to be playing out again in 2019 as reflected by the recent “shift in mood” in markets, “due to the de-escalation in the U.S./China trade war, the move by Hong Kong to remove the bill for extradition to mainland China, and the lowered odds of a no-deal Brexit,” says Michael Kramer of Mott Capital Management. “Suddenly the dense fog of gloom and doom of last month appears to be lifting.”

Another sign market risk trends may be easing is that the VIX indicator, which measures volatility, is falling.

“Now the risk aversion trade may be unwinding. The VIX, for example, had been trading in a range of 16 to 21 throughout August. But as of September 5, that measure of volatility is testing support at 16, and could be heading lower as fears continue to ease,” says Kramer.

Gold is a traditional safe-haven commodity which investors buy when markets turn risk-averse. It has reached a key resistance level where it will probably pull-back from. This further suggests an improvement in market sentiment which is likely to support the Rupee.

“Additionally, the gold ETF has been rising as fears have been mounting too. But now gold is bumping up against a level of strong resistance at a price of around $149. Also, the pattern in the chart is known as a bump and run, a bearish reversal pattern, an indication that gold is due to fall,” adds Kramer.

Gold’s previously bullish momentum, as measured by RSI, is waning, a sign the commodity risks falling in price.

“Meanwhile, the relative strength index (RSI) is also flashing warning signs as it has been trending lower, despite the price of gold trending higher, a bearish divergence. Should gold fall below the uptrend at a price of approximately $143. It could drop back to support at a price of around $136.50, a decline of about 5%,” says the asset manager.

Taken together these are all positive signs for the Rupee.

Gold chart

On the domestic data front, the Rupee could also be impacted by inflation data which is forecast to show a rise to 3.30% in August from 3.15% in the previous month.

Higher inflation tends to be positive for a currency, for although high inflation is often thought of as bad for the economy, in the current relatively low global growth climate it is actually seen as reflecting stronger consumer demand, and growth.

Higher inflation also drives up interest rates which increase foreign capital inflows and demand for the currency.

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