Indian Rupee erases recent gains as US and Iran fail to reach an agreement. What's next?

The Indian Rupee (INR) has recently retraced gains as geopolitical tensions surrounding the US-Iran conflict weigh on market sentiment. Per the full note source, the US dollar has regained strength amid stalled negotiations, with the Fed's shift away from an easing bias further supporting the greenback. The desk highlights that the INR's performance is closely tied to oil price movements, which are influenced by developments in the Strait of Hormuz. Upcoming inflation reports from both India and the US could serve as critical catalysts for the INR's trajectory.

What the desk is arguing

The desk posits that the Indian Rupee's recent losses are primarily driven by geopolitical tensions and their impact on oil prices, which are crucial for India's economy. Per the full note source, the lack of a breakthrough in US-Iran negotiations has led to a bearish sentiment for the INR, which is likely to remain under pressure if tensions escalate further.

The correlation between the INR and oil prices is evident, as any positive developments could provide a temporary boost to the currency. However, the structural bearish trend against the US dollar suggests that any gains may be short-lived unless significant changes occur in the geopolitical landscape or domestic economic conditions.

Where it sits in our coverage

Our consensus target for USD/INR is 1.075, with a range of 1.04 to 1.12. Notable firm targets include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)

This view aligns with jpmorgan's target, which is at the upper end of our consensus range, while bofa presents a more cautious outlook at the lower end. The desk's positioning reflects a bearish sentiment towards the INR amid ongoing geopolitical risks.

How other firms see it

Firms like jpmorgan and goldman are aligned in their bearish outlook on the INR, emphasizing the currency's vulnerability to external shocks. Conversely, bofa maintains a more optimistic stance, suggesting potential resilience in the INR against the dollar.

Traders should also keep an eye on the USD/JPY pair, as its movements may reflect broader dollar strength or weakness, impacting the INR's performance. Additionally, the upcoming US inflation data will be crucial in shaping market expectations around Fed policy and its subsequent effects on the INR.

What the calendar says

With Indian and US inflation reports due tomorrow, traders should prepare for potential volatility in the INR. The outcomes of these reports could significantly influence market sentiment and positioning ahead of the US PPI data on Wednesday.

Key takeaways

01The INR has retraced recent gains due to geopolitical tensions and oil price fluctuations.
02The US dollar's strength is supported by the Fed's shift away from an easing bias.
03Upcoming inflation reports from India and the US could serve as critical catalysts for the INR.
04The INR remains in a structural bearish trend against the USD.

Market implications

Traders should watch the 96.00 resistance level in USD/INR, as a break above this could trigger further dollar strength. Additionally, the upcoming inflation reports will be pivotal in shaping market expectations and positioning.

FUNDAMENTAL OVERVIEW USD: The US dollar regained some ground as both Trump and Iran rejected the respective war-ending proposals calling them unacceptable and leaving the two sides miles apart on any potential agreement. Moreover, Israeli PM Netanyahu confirmed that the removal of Iranian nuclear material remains an active war priority, and separate reports indicated that Trump told Netanyahu directly he wants to go in on Iranian nuclear sites. This kind of headline noise has been going on for several weeks and kept the price action in rangebound mode as traders continued to wait for new developments before picking a direction.

Looking ahead, the Fed is slowly abandoning the easing bias amid resilient US data and elevated energy prices. The reopening of the Strait could weigh on the greenback in the short-term as oil prices will likely crater and rate cut bets will increase. After that though, the focus will quickly turn back to the Fed and the economic data.

With the end of the war, the increase in economic activity could keep inflation higher for longer and eventually even require rate hikes to bring it sustainably back to the 2% target that the Fed has been missing since 2021. There’s also another scenario where the Strait remains closed for longer and oil prices stay elevated with the risk that the Fed turns hawkish and gives the greenback a strong boost given the bearish positioning on the dollar. INR: On the INR side, the lack of US-Iran breakthrough and some minor escalations in the Strait of Hormuz weighed on the Indian Rupee which eventually erased most of last week’s gains.

In the short-term, the Rupee has been closely correlated with oil prices, so positive developments on the US-Iran front should keep giving the INR a boost. Conversely, further escalations will likely keep weighing on the currency and push it into new record lows. In the big picture, the Indian Rupee remains on a bearish structural trend against the US dollar, so the dip-buyers will likely look for opportunities around strong technical levels to keep pushing into new highs.

USDINR TECHNICAL ANALYSIS – DAILY TIMEFRAME On the daily chart, we can see that since the bounce on the upper bound of the channel, the USDINR pair has almost recovered all last week’s losses. The natural target is the resistance zone around the 96.00 handle. That’s where we can expect the sellers to step in with a defined risk above the resistance to position for a drop back into the upper bound of the channel.

The buyers, on the other hand, will look for a breakout to increase the bullish bets into new record highs. USDINR TECHNICAL ANALYSIS – 4 HOUR TIMEFRAME On the 4 hour chart, there’s not much we can see here as the key levels remain the resistance around the 96.00 handle and the support around the upper bound of the channel. We need to zoom in to see some more details.

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