The Indian Rupee (INR) bounced back after hitting a two-month low of 86.20 against the US Dollar (USD), rising to around 86.00. Meanwhile, the US Dollar Index (DXY) fell to near 98.00 from a daily high of 98.36. The conflict between Israel and Iran is leading more investors to seek safe assets like the US Dollar. With no resolution in sight, demand for these safe-haven assets is growing.

Impact On Oil Prices

Iran may close the Strait of Hormuz, a key oil route, which could raise oil prices. This would be a problem for India, as the country relies heavily on oil imports. The US Dollar’s performance varied against other currencies, especially declining against the Australian Dollar. The Federal Reserve is expected to keep interest rates steady on Wednesday, and the market is focused on future rate predictions in light of changing economic policies and rising oil prices. India’s inflation data and outflows of foreign investments are contributing to the rupee’s weakness, even as CPI growth slows to its lowest in six years. In the stock market, Foreign Institutional Investors are selling off Indian shares, impacting market trends. The USD/INR rate fell back after reaching a two-month high, with the 20-day EMA serving as a key support level. With the rupee recovering from its recent low near 86.20 and now hovering just above 86.00, it appears we are in a pause rather than a full turnaround. The currency’s dip was somewhat expected due to various domestic and international factors. However, the rapid rebound indicates some technical resistance at that point, likely spurred by short-term profit-taking or a slight decline in global Dollar strength. The drop in the US Dollar Index (DXY) to around 98.00 suggests a temporary decrease in demand for the greenback. However, with no diplomatic progress between Israel and Iran, the overall risk environment remains tense. Demand for safe-haven assets usually increases during such times, especially when vital energy routes like the Strait of Hormuz are at risk.

Currency Market Volatility

Any significant disruption to oil supplies through that strait could drive oil prices higher, worsening India’s trade balance as an oil-importing nation. This relationship remains stable, and little has changed in that regard. If Brent or WTI oil prices reach new highs due to supply issues, it will add pressure on the rupee, especially with foreign investors pulling out. While the Federal Reserve is expected to maintain its current policy, it still heavily influences capital flows. The Fed’s future interest rate decisions will impact yield spreads and, in turn, Dollar demand. With renewed oil volatility, the bond market is likely to react more strongly. The upcoming statement from policymakers will be important not just for rates but for future guidance, which can also affect volatility. Spread trades are already reflecting this. In India, mixed economic indicators are pushing the rupee into a defensive position. Although consumer inflation has dropped to a six-year low, this has not strengthened the rupee. The ongoing foreign capital outflows are undermining both equity and currency performance. On the charts, the pullback of USD/INR from its two-month high is notable, with the 20-day EMA currently serving as psychological and technical support. If it falls below this level, short-term traders may reconsider bullish positions. However, without a significant rebound in inflows or stabilization in energy prices, pressure on the rupee will likely persist. Volatility has also returned to G-10 currency markets, making hedging strategies especially relevant. The Dollar’s drop against the Australian Dollar indicates a selective unwinding of defensive positions, possibly due to better data or shifts in commodity prices. The risk-on versus risk-off sentiment is varied, and this needs to be reflected in derivatives. In the near term, we are monitoring options pricing as implied volatility rises. Hedgers may need to adjust their strategies and revisit assumptions about oil prices or Dollar demand. Any new geopolitical developments or hawkish comments from the Federal Reserve could quickly increase demand for safe-haven assets. This means that spreads, especially for calendar and cross-currency trades, may see increased activity. For now, keep an eye on oil futures and Treasury yields; they appear to provide clearer direction than equities, which are still experiencing foreign selling. Create your live VT Markets account and start trading now.

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