• The Indian Rupee comes under pressure again as energy prices rally further.
• The exchange of attacks between the US and Iran on oil tankers has lifted oil prices.
• Financial market experts hold a hawkish view on the Fed’s monetary policy outlook.

The Indian Rupee (INR) retreats from its two-month high against the US Dollar (USD) on Tuesday. The USD/INR pair recovers to near 94.90 from its two-month low of 94.29 posted last week as the impact of higher oil prices on the pair seems to be outweighing the lower US Dollar, which has come under pressure amid caution ahead of the United States (US) Consumer Price Index (CPI) scheduled for Friday.

As of writing, the US Dollar Index (DXY), which gauges the Greenback’s value against six major currencies, trades 0.1% lower to near 98.80.

In the opening session, the MCX Crude Oil contract expiring on September 21 is up 0.6% to near Rs. 8,818, the highest level since May 22.

Asia ex-Japan FX faces energy headwinds despite softer Dollar backdrop

According to OCBC, the renewed rise in oil prices and higher US Treasury yields “risks an unfavourable backdrop for much of Asia ex-Japan (AXJ) given the region’s dependence on energy imports” and could “restrain the extent of FX appreciation even if the broader USD stays contained.” The bank suggests that, while a softer Dollar tone may offer some relief, the terms-of-trade shock from elevated energy costs is likely to cap gains for many Asia ex-Japan currencies.

Financial markets expect oil prices to rise further amid continued clashes between the US and Iran. Strategists at Societe Generale said in a note that Brent has “crossed a multi-month descending trend line and is gradually advancing toward the July peak around $102.” They argue that “a move above $102 may extend the uptrend toward the next projections around $108/$110 and $117.” Such a scenario would put more strain on the Indian currency.

Oil risk premia build as Hormuz traffic remains fragile

Analysts at Commerzbank warn that the latest geopolitical flare-up has materially heightened supply risks, noting that "the latest escalation increases the risk that the recent improvement in oil flows through Hormuz is reversed." They point out that "observable traffic through the Strait remained sparse over the weekend," even as "some tankers continue to transit with tracking systems switched off or with military support," underscoring how fragile and opaque the current flow dynamics have become.

US CPI data to influence Fed’s interest rate expectations

This week, the major highlight will be the US CPI data for August, which is expected to reshape the Federal Reserve’s (Fed) interest rate expectations.

According to TD Securities, this week’s inflation data should be “subdued enough to keep the Fed on hold,” though they stress that “the PCE translation will be key” in shaping the policy outlook. The bank expects that “the Fed [will] remain on hold over our forecast horizon,” arguing that while “inflation should remain high for the rest of the year, and the labor market has stabilized,” these dynamics give the FOMC scope to “shift focus to its inflation mandate.” TD Securities cautions that, if policymakers do adjust rates, “if the Fed were to move this year, we believe that move is more likely to be a hike than a cut.”

Currently, the CME FedWatch tool shows that the odds of the Fed hiking interest rates at the policy meeting next month are 58.4%.

USD/INR Technical Analysis

USD/INR trades at 94.90, keeping a bearish near-term tone as it holds below the 20-period exponential moving average (EMA) at 95.14. The pair remains pressured by this nearby dynamic resistance; however, a sharp recovery in the Relative Strength Index (RSI) above 41.00 suggests strong buying demand on lower levels.

On the topside, the 20-period EMA at 95.13 is the first resistance level that bulls would need to reclaim to ease immediate selling pressure and open the way for a further recovery towards 95.50. On the downside, the two-month low at 94.15 is the key support level.

(The technical analysis of this story was written with the help of an AI tool. Know more.)

Economic Indicator

Consumer Price Index (YoY)

Inflationary or deflationary tendencies are measured by periodically summing the prices of a basket of representative goods and services and presenting the data as The Consumer Price Index (CPI). CPI data is compiled on a monthly basis and released by the US Department of Labor Statistics. The YoY reading compares the prices of goods in the reference month to the same month a year earlier.The CPI is a key indicator to measure inflation and changes in purchasing trends. Generally speaking, a high reading is seen as bullish for the US Dollar (USD), while a low reading is seen as bearish.

The US Federal Reserve (Fed) has a dual mandate of maintaining price stability and maximum employment. According to such mandate, inflation should be at around 2% YoY and has become the weakest pillar of the central bank’s directive ever since the world suffered a pandemic, which extends to these days. Price pressures keep rising amid supply-chain issues and bottlenecks, with the Consumer Price Index (CPI) hanging at multi-decade highs. The Fed has already taken measures to tame inflation and is expected to maintain an aggressive stance in the foreseeable future.

Sagar Dua is associated with the financial markets from his college days. Along with pursuing post-graduation in Commerce in 2014, he started his markets training with chart analysis.