The Pound is making a recovery at the start of the new trading week on easing political risks although insufficient bullish progress has been made so far to warrant the adoption of a more constructive stance.
The Pound-to-Rupee exchange rate starts the new week in the ascent after the Pound recovered following a reaffirmation of confidence in Theresa May’s leadership by many of her leading cabinet ministers.
This has triggered a broad-based recovery in the Pound, but despite this it is still too soon to call a bullish reversal in GBP/INR – one up day is not enough to confirm a technical reversal.
We thus retain out bearish stance on GBP/INR which could still break to new lows, extending the trend down which started after the September highs rolled over.
The next key level to the downside is 85.12, the 50.0% retracement from the August-September rally (circled).
This is a key support and resistance level where the pair often stalls, bounces or reverses.
Given the strong rebound today we would ideally like to see a more forceful downside break to re-confirm the downtrend and as such would ideally like to see a clear break below the 50% level, confirmed by a break below 85.00.
Such a move would then be expected to extend lower to a target at 84.52 where the 50-day moving average is situated, another key support and resistance level, which would be expected to break the pair’s fall.
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Questioning India's Fundamentals: Headwinds to the INR
India's fundamental backdrop does not necessarily encourage an all-out bullish view on the Rupee however.
India used to be the fastest growing economy in the world and investors flocked to put their capital into the country, buying stocks, bonds or other investments, however, about six months ago growth started slowing and the outlook changed.
The government’s de-monetisation reform which took a lot of high denomination notes out of circulation created a form of de facto monetary tightening by reducing money flow overnight.
Its imposition of a sales good tax like VAT has also weighed on growth.
Now rising commodity prices are producing a further headwind, according to J P Morgan’s, analyst, Jonathan Cavenagh.
“Headwinds to INR have risen over the past few months. The trend move higher in commodity prices has driven a deterioration in the current account, which has been accentuated by a pick-up in underlying imports as well,” says Cavenagh.
Whilst he acknowledges a “structurally bullish” story for INR over the medium-term, the outlook in the short-term is not particularly positive given the central bank’s concern over the impact of a strong currency on Indian SMEs, and therefore reluctance to use policies to help it.
The Indian Reserve Bank’s high FX Reserves mean it can defend INR either way, and Cavenagh thinks this will keep it broadly “bounded”.