USD/INR extends its recovery ahead of Indian CPI data

• Indian Rupee weakens on Monday on the renewed USD demand, higher oil prices. 
• The Reserve Bank of India (RBI) is expected to cut rates by 25 bps in each of the third and fourth quarters. 
• Investors await India’s CPI inflation data due on Monday at 12:00 GMT.

Indian Rupee (INR) loses traction on Monday amid US Dollar (USD) demand from state-run banks and a rise in oil prices. India’s Consumer Price Index (CPI) for January will take center stage at the beginning of the week. The Reserve Bank of India (RBI) maintained its repo rate at 6.50% for a sixth consecutive meeting on February 8, citing food price shocks as a significant risk to the current disinflation trend. 

The Indian central bank is anticipated to leave its key policy rate unchanged until the June meeting before cutting it by 25 basis points (bps) in each of the third and fourth quarters, a relatively moderate move compared to other major central banks' easing cycles.

On the other hand, the robust US economic data and pushback from Fed officials on market expectations of early rate cuts boost the USD and lift the US bond yield, which acts as a tailwind for the USD/INR pair.

Moving on, India’s CPI inflation data, Industrial Production, and Manufacturing Output are due on Monday at 12.00 GMT. The Wholesale Price Index (WPI) Food, Fuel, and Inflation for January will be released on Wednesday.

On the US docket, the January CPI report will be in the spotlight on Tuesday. The headline Consumer Price Index (CPI) is expected to slow from 3.4% in December to 3.0% in January. The inflation reports over the next few months could be critical in determining the timeline for when the Fed will cut its benchmark interest rate.

Daily Digest Market Movers: Indian Rupee remains vulnerable to high inflation

• The headline CPI inflation was forecast to fall to 5.09% in January from 5.69% in December. 
• Inflation will average 5.4% this fiscal year and 4.7% in the next, close to the RBI's forecasts of 5.4% and 4.5%, according to a Reuters poll. 
• Indian bond yields jumped after the RBI rate decision, with the 10-year benchmark bond yield closing at 7.1067% on Friday, the highest since January 31.
• The revised CPI figures rose by 0.2% in December from the previous month, compared to the initial estimate of 0.3%, according to the Bureau of Labor Statistics on Friday.  
• Dallas Fed President Lorie Logan said that she is not in a hurry to cut interest rates. She added that although there has been "tremendous progress" in decreasing inflation, additional data is needed to confirm the progress is durable.

Technical Analysis: Indian Rupee faces further range-bound movement in the longer-term

Indian Rupee trades softer on the day. USD/INR remains confined within a multi-month descending trend channel between 82.70 and 83.20.

In the near term, the pair is below the key 100-period Exponential Moving Average (EMA) in the daily timeframe, suggesting the sellers are likely to stay in control. Furthermore, the 14-day Relative Strength Index (RSI) lies below the 50.0 midline, hinting that support levels are more likely to break than to hold.

If sellers take back control of USD/INR, the initial support level is seen at a low of February 2 at 82.83. The critical upside barrier will emerge near the lower limit of the descending trend channel at 82.70. Sustained bearish pressure could still pave the way to a low of August 23 at 82.45, followed by a low of June 1 at 82.25.

In the case of a bullish trading environment, the confluence of the upper boundary of the descending trend channel, the psychological round figure, and the 100-period EMA at the 83.00–83.05 zone act as a key resistance level for USD/INR. A clear upside breakout above this region will move towards a high of January 18 at 83.20. We may see a trip to a high of January 2 at 83.35, and the 84.00 psychological level if there’s enough bullish momentum.