The Indian Rupee (INR) opened positively against the US Dollar (USD) on Thursday, marking a significant correction after enduring a five-day losing streak. 

The USD/INR currency pair slipped to near 86.45, reflecting a shift in market sentiment driven by fresh optimism surrounding global trade developments and upcoming economic data. The brokers at Arbitics explore this subject thoroughly, providing a helpful and detailed overview.

Market Sentiment Boosted by US-EU Trade Hopes

The rally in the Indian Rupee comes amid growing hopes that the United States (US) and the European Union (EU) are nearing a trade agreement, potentially avoiding the tariff escalations scheduled for August 1. 

According to a report published by the Financial Times (FT) on Wednesday, Washington and Brussels are expected to finalize a deal including a 15% tariff rate on imports from the EU. This proposed tariff level is a compromise after the EU accepted a higher baseline tariff, thus preventing a damaging trade war.

This move follows the earlier US-Japan trade agreement, announced on Tuesday, where the US reduced baseline and automobile tariffs from 25% to 15%. Such developments have alleviated concerns over global trade tensions, leading to a drop in demand for safe-haven assets like the US Dollar.

At the time of writing, the US Dollar Index (DXY), which measures the Greenback‘s strength against six major currencies, holds losses near a two-week low of 97.15, reached on Wednesday. This decline underscores the weakening USD in response to the positive trade outlook.

Indian Rupee Recovers, But Risks Remain

Despite the positive opening for the INR, caution remains. The Foreign Institutional Investors (FIIs) continue to reduce their exposure in the Indian equity markets. On Wednesday, FIIs recorded a net outflow of Rs. 4,209.11 crores, contributing to a cumulative July sell-off of Rs. 26,395.01 crores. This persistent equity selling pressure poses a risk to sustained INR strength, as reduced foreign inflows can weigh on the currency.

Key Economic Data on the Horizon

Investors are keenly awaiting the preliminary Purchasing Managers’ Index (PMI) data for July from India and the US, which will provide insights into the underlying health of business activity amid the backdrop of global trade uncertainties.

• The India HSBC PMI data, scheduled for release at 05:00 GMT, will indicate whether domestic business activity has been affected by the ongoing tariff uncertainties.
• The Reserve Bank of India (RBI) released its monthly bulletin for June, noting that overall business activity remained resilient, buoyed by strength in the services sector and summer-sown crop production. However, industrial growth was described as modest.
• The RBI also cautioned about potential volatility in financial market sentiment given the uncertain trajectory of India-US trade relations and mixed corporate earnings in the first quarter.

The flash US S&P Global PMI data  is expected to show accelerated expansion in both the manufacturing and services sectors. Strong US business activity data could influence the USD and consequently impact the USD/INR pair.

Technical Analysis: USD/INR Retraces to Near 86.40

From a technical perspective, the USD/INR pair corrected lower to approximately 86.40 in early Thursday trading after hitting a monthly high near 86.65 the previous day. Despite this pullback, the short-term trend remains bullish:

• The 20-day Exponential Moving Average (EMA) is trending upwards around 86.15, providing a key dynamic support.
• The 14-day Relative Strength Index (RSI) is approaching a critical level near 60.00. A sustained break above this level would signal renewed bullish momentum, possibly pushing the pair higher.
• On the downside, the 50-day EMA near 85.85 acts as strong support, preventing sharper declines in the near term.
• Resistance remains intact near the June 23 high of about 87.00, which is a critical hurdle for the USD/INR pair.

Summary

The Indian Rupee managed to snap its five-day losing streak and opened positively against the US Dollar, largely driven by improving market sentiment on prospects of a US-EU trade deal. The easing of trade tensions reduced demand for the safe-haven US Dollar, pushing USD/INR lower.

However, the outlook for the INR is not without risks, as persistent foreign institutional selling in Indian equities and uncertainties around India-US trade negotiations keep the market cautious.

Key economic indicators, including India’s and the US’s PMI data releases later on Thursday, are likely to provide fresh directional cues for the USD/INR currency pair.

From a technical standpoint, the USD/INR pair remains in a short-term bullish trend, with important support levels at the 20-day and 50-day EMAs, while resistance near 87.00 will be closely watched by traders.