The Indian Rupee (INR) has dropped for the third day in a row against the US Dollar (USD), hitting a three-month low. This decline is largely due to fears about rising oil supply costs linked to the worsening Middle East conflict, which drives up India’s import expenses. During U.S. trading, the USD/INR is around ₹86.79, just below its earlier peak of ₹86.89 from the European session. The US Dollar Index is strong at about 99.00 after the Federal Reserve decided to keep interest rates steady. Trading volumes are expected to rise on Friday following the Juneteenth holiday, which could influence market trends.

Impact of the Iran-Israel Conflict

The ongoing Iran-Israel conflict includes heavy strikes from both sides, with the U.S. deploying more military assets in the area to deter further escalation. The Rupee’s decline reflects growing risk aversion, especially given the possibility of increased U.S. involvement. India’s inflation rate fell to 2.8% in May due to lower food prices, but core inflation is climbing, influenced by global economic pressures. India’s Petroleum and Natural Gas Minister assured the market that oil reserves are sufficient despite supply worries from the conflict. Brent crude prices rose to nearly $76.78 per barrel, while West Texas Intermediate hovers around $75. India’s trade routes are facing challenges, complicating transactions with Iran and Israel. Federal Reserve officials hinted at potential rate cuts later this year, depending on economic data. The USD/INR is gaining upward momentum, showing strong breakout patterns. The Rupee’s value is affected by several external factors, including oil prices, the strength of the US Dollar, and actions by the Reserve Bank of India. Macroeconomic factors like inflation, interest rates, and trade balances also impact its value. As the Indian Rupee continues to weaken against the US Dollar, this downward trend reflects increased external pressure, mainly from energy prices. The rise in Brent crude prices to nearly $76.78 per barrel is significant—it directly impacts India’s import bills. As a net energy importer, India feels the effects of rising crude prices more acutely, amplifying the currency’s weakness, as seen in recent trading. West Texas Intermediate holding steady adds to the pressure. Positioning in the USD/INR pair is tightening as trading volumes recover after the holiday. The typical calm following a U.S. market closure often hides underlying movements, but as liquidity increases, volatility may rise. With American traders returning on Friday, the market might see recalibrations, especially if risk aversion increases due to ongoing geopolitical tensions.

US Forex Market Response

Fed speakers have not changed their tone much, but the markets see their data-driven approach as a sign that rate adjustments might happen. While the official rates remain steady, earlier hawkish comments now seem to soften slightly. If inflation data from the U.S. comes in lower than expected, we could see a change. However, the US Dollar remains strong, putting pressure on weaker currencies, including the Rupee. Domestically, even with a drop in headline inflation to 2.8%, core inflation excluding food and fuel continues to rise. This shows that while food prices may have eased, other sectors still face pressure. This difference indicates that the central bank may remain cautious, especially as energy prices could disrupt the trend of decreasing inflation. We noted the Petroleum Minister’s reassurance about India’s reserves. However, verbal assurances can only go so far amid real logistical challenges and shipping disruptions. Any issues along supply routes, especially those involving Iran and Israel, could cause additional delays or cost increases. While India’s trade with these nations isn’t dominant, it’s crucial for several key goods, adding another layer of vulnerability for the INR. Technical indicators suggest a possible retest of earlier resistance levels. Current breakout patterns imply that buyers are becoming more confident. Previous attempts to push the USD/INR past key levels were cautious, but the current firm demand for dollars appears more substantial. Currency desks are closely monitoring movements, looking for sustained closes above recent highs. A few more sessions of consistent bias could indicate a stronger trend. It’s important to consider that central bank interventions, while not explicitly confirmed, may be anticipated if the depreciation quickens. However, such actions usually aim to reduce volatility rather than maintain a specific level. It’s likely that policymakers will first watch for signs of macroeconomic stress, such as trade balances or external borrowing, before intervening. The overall situation is complex. Global risk sentiment is shifting, and currently, external commodity price increases are putting pressure on emerging market currencies. With the Federal Reserve keeping its options open and unresolved geopolitical tensions making traders cautious after every news update, long-term confidence in market direction will likely remain unclear until these issues stabilize. For those monitoring market movements and planning strategies, energy price fluctuations and interest rate expectations are crucial. This environment does not reward complacency, as unexpected data from the U.S. or crude inventories could lead to sharp market reversals. We are tracking macroeconomic releases closely, as well as supply flows through the Gulf, to see if pressures will ease or escalate in the coming weeks. Create your live VT Markets account and start trading now.

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