The Indian Rupee (INR) is stable against the US Dollar (USD) thanks to the Reserve Bank of India’s (RBI) efforts to keep it above the record low of 88.87. Inflation in India is expected to drop to 1.7%, leading to speculation about possible interest rate cuts. During Asian trading hours, the USD/INR pair hovers around 88.70. Recent INR gains stem from positive news about India-US trade talks and foreign institutional investments since October 7. However, inflation forecasts are putting some pressure on the INR.

Challenges for the US Dollar

The US Dollar is facing difficulties due to the ongoing government shutdown, which is affecting paychecks and is expected to continue through the Columbus Day holiday. The US Dollar Index (DXY) is relatively weak, trading around 98.90, down over 0.5% from the previous session. The Federal Reserve is considering more rate cuts, with a 96% chance of a reduction in October, followed by another in December. Technical analysis of USD/INR suggests a positive outlook, with resistance at 88.87 and support around the nine-day EMA of 88.70. Several factors influence the INR, including crude oil prices, the value of the US Dollar, foreign investment, RBI actions, and interest rates. Additionally, macroeconomic elements like inflation, GDP growth, and trade balance play a crucial role in determining the Rupee’s value. Currently, the USD/INR pair operates within a narrow range, constrained by the RBI’s support near the 88.87 record high and ongoing weakness of the Rupee. This dynamic between a strong seller (the RBI) and fundamental pressures creates a unique trading environment. Derivative traders should be aware that the central bank’s actions might suppress implied volatility. A weaker Rupee is becoming more likely due to India’s cooling inflation. After persistent inflation driven by food prices throughout much of 2024, the current forecast of 1.7% is significantly below the RBI’s target. This data indicates that the RBI may soon transition from intervention to rate cuts, making the Rupee less attractive.

Headwinds for the US Dollar

The US Dollar also faces significant challenges that hinder a simple rally in the USD/INR pair. The government shutdown is creating economic uncertainty, and the CME FedWatch Tool shows a 96% chance of a Fed rate cut this month. This dovish stance from the Fed, reacting to declining US inflation in 2024, limits the dollar’s strength against other currencies. The RBI has a strong reputation for defending the Rupee, and we should recognize its power. India’s foreign exchange reserves, which exceeded $650 billion earlier this year, offer substantial support to manage market pressures for weeks. The RBI’s consistent actions have shown a commitment to preventing a steep depreciation beyond the 88.87 threshold. Due to these opposing forces, selling volatility seems to be a smart strategy for the upcoming weeks. Options traders might consider selling short-dated straddles or strangles, profiting if the USD/INR pair stays range-bound between current support levels and the RBI’s established line in the sand. This tactic allows traders to earn premium from minimal price movement. However, we should remain vigilant for a potential breakout if pressures mount too heavily for the RBI to handle. A sustained move above the 88.87 high would indicate that the central bank is withdrawing support, possibly causing a swift rise toward 89.50. Traders should implement strict stop-losses for any volatility-selling positions and might place buy-stop orders above this critical resistance level to capture any breakout. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now