**Equity Outflows and the Rupee** The Indian Rupee received a boost after India lowered EU car import tariffs from 110% to 40%, which improved market sentiment. Initially, the Rupee weakened due to rising equity outflows and importers hedging their positions. However, a possible trade deal between India and the EU could enhance exports in pharma, textiles, and chemicals, providing support for the Rupee. The USD/INR exchange rate stayed close to its peak of 91.96, the highest since January 23. India has agreed to cut duties on certain vehicles priced above EUR 15,000, benefiting car manufacturers. Still, the Rupee might face pressure against the Dollar as traders remain cautious ahead of the Federal Reserve’s decisions. Recently, the US Dollar dipped by 0.03% against the Rupee. Equity outflows have affected the Rupee, but a potential free trade agreement with the EU could help mitigate these risks. Support may also be found in positive market sentiment in the US and Asia, particularly after discussions on possible tariff rollbacks. The Reserve Bank of India’s boost to liquidity is expected to stabilize funding conditions. The US Dollar Index experienced weakness due to political uncertainty and risks of a government shutdown, with the Senate facing a deadline of January 30. Economic indicators such as GDP growth and jobless claims exceeded expectations, although inflation remains a concern. Fed officials have shown caution regarding policy easing, which influences USD performance. According to technical analysis, the USD/INR is exhibiting a bullish trend within an ascending channel, trading near 91.80. The immediate resistance is at the all-time high of 91.96, while support is provided by the nine-day EMA at 91.28. The Rupee is influenced by India’s economic growth, foreign investment levels, and oil import reliance, with inflation and seasonal USD demand also playing significant roles. **Impact of India-EU Free Trade Agreement** India’s steady growth rate of 6.13% since 2006 has drawn foreign investment, boosting demand for the Rupee. High oil prices, typically traded in USD, affect the Rupee directly by increasing USD demand. If inflation exceeds the RBI’s 4% target, this could strengthen the Rupee through potential interest rate hikes, while seasonal fluctuations in USD demand might weaken it during high import periods. With USD/INR near its all-time high of 91.96, India’s decision to cut EU car import tariffs introduces notable two-way risks. This creates a dynamic of a strong uptrend against positive local news, suggesting potential volatility ahead. Derivative traders should prepare for rapid price movements, especially around the Federal Reserve’s policy decision this Wednesday. The possibility of a broader India-EU free trade agreement is significant and could provide strong support for the Rupee. Data shows that EU-India trade in goods surpassed €115 billion in 2023, implying that a new deal could attract considerable foreign investment and boost important export sectors. Selling out-of-the-money USD/INR call options might be a smart move to capitalize on a failure to maintain gains above the 92.00 level. However, we must be mindful of the ongoing bullish trend, driven by strong US economic data. Recent US GDP growth of 4.4% and persistent core inflation at 2.8% may lead the Federal Reserve to maintain a hawkish stance, postponing anticipated rate cuts. This ongoing interest rate advantage for the US dollar could overshadow local sentiment and push the pair higher. It’s also essential to consider the Reserve Bank of India’s ability to intervene to reduce volatility. Historically, India’s foreign exchange reserves have remained robust, often exceeding $620 billion in 2024 and 2025. This provides the central bank with adequate tools to defend the Rupee against speculative pressures. Conversely, the US Dollar is dealing with its own challenges from rising political uncertainty, including the risk of a government shutdown by the January 30 deadline. Previous shutdowns have created significant economic impacts and risk-off sentiment that could weaken the dollar temporarily. This situation presents a near-term downside risk for the USD/INR, despite the broader upward trend. From a technical perspective, the Relative Strength Index (RSI) is currently overbought at 78, suggesting the recent rally may be overextended and due for a correction. This could lead the pair to pull back to the support level at 91.28. Given these mixed signals, traders might explore strategies like long straddles that can benefit from large price movements in either direction leading up to events in the near future. Create your live VT Markets account and start trading now.

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