The USD/INR pair climbed to a fresh two-month high on Thursday, reaching 86.65, as geopolitical tensions in the Middle East escalated sharply. A Bloomberg report suggested that the United States might consider military action against Iran in the coming days, which has amplified safe-haven flows into the US Dollar (USD) and driven selling pressure on risk-linked currencies like the Indian Rupee (INR).
Fletrade’s season broker, Sean Lawrence, shares a well-researched, expert-driven explanation of the matter here.
Heightened Geopolitical Risks Fuel Safe-Haven Demand
Concerns are intensifying over the ongoing conflict between Israel and Iran, now entering its seventh day, with Washington possibly escalating the situation by launching a direct strike on Iran. The US has reportedly mobilized military assets in the region to defend its bases, signaling increased readiness.
In a televised interview, Defense Secretary Pete Hegseth affirmed that the US posture in the region is “defensive but strong” to preserve prospects of a peace deal.
This rising geopolitical uncertainty has fueled a global demand shift towards safe-haven assets, with the US Dollar Index (DXY) climbing to a weekly high of 99.10. As investors reduce exposure to riskier assets, currencies of economies with high oil-import dependency, such as India, have come under pressure.
Higher crude oil prices, driven by fears of supply disruptions, are worsening the INR’s vulnerability.
Oil-Driven Pressure on the Indian Rupee
India’s dependence on imported crude oil leaves the INR highly sensitive to changes in global energy prices. As Brent crude flirts near $92 per barrel, the current account balance and trade deficit outlook for India deteriorate, adding downward pressure on the currency.
Moreover, investor sentiment is deteriorating amid dismal market conditions, compounding the INR’s decline.
Beyond global concerns, domestic fundamentals are also weighing on the Rupee. Expectations are rising that the Reserve Bank of India (RBI) may opt for further interest rate cuts in 2025, following moderate inflation prints in May. The Consumer Price Index (CPI) and Wholesale Price Index (WPI) showed signs of cooling inflation, with headline figures undershooting projections.
Federal Reserve Signals: Fewer Cuts in the Long Term
The Federal Reserve (Fed), meanwhile, kept its benchmark rate steady in the 4.25%–4.50% range for the fourth straight meeting, aligning with market consensus. However, a crucial element in the Fed’s forward guidance was the revision of the 2026 and 2027 rate projections, suggesting fewer rate cuts in the outer years, despite retaining the two projected cuts for 2025.
Fed Chair Jerome Powell acknowledged the recent soft inflation data, but added caution by pointing to rising tariff effects stemming from the US President’s trade policies. He warned that tariff increases could “weigh on economic activity and push up inflation,” introducing stagflation risks, a combination of sluggish growth and elevated prices.
Technical Outlook: Bullish Momentum Continues for USD/INR
From a technical analysis perspective, the USD/INR pair continues to show bullish momentum as the price breaks above the critical 86.60 resistance zone. The 20-day Exponential Moving Average (EMA) at 85.95 is trending upward, supporting the broader uptrend.
The 14-day Relative Strength Index (RSI) has crossed above the 60.00 threshold, confirming the presence of fresh buying momentum.
Should the pair maintain this trajectory, the next significant resistance level lies at the April 11 high of 87.14. A break above this zone would confirm a bullish continuation, opening the door to further appreciation in the near term.
Broader Market Implications
The prospect of US military involvement in Iran is a major risk event for global financial markets. It has already triggered a rotation into safe-haven assets, including the USD and gold, while equities, emerging market currencies, and high-yield bonds have come under selling pressure.
For India, the dual headwinds of rising oil prices and global risk aversion are compounding stress on the Rupee. If tensions persist or escalate, the INR could be on track for further depreciation, particularly if the RBI moves toward rate cuts in an environment where the Fed is signaling longer-term policy restraint.
In conclusion, the USD/INR rally reflects a confluence of geopolitical instability, oil-driven external vulnerabilities, and divergent monetary policy expectations between the Fed and RBI. Unless diplomatic breakthroughs materialize or energy prices stabilize, the path for the INR remains biased to the downside.
