USD/INR loses traction amid US recession fears

• The Indian Rupee edges higher in Tuesday’s early Asian session. 
• India’s foreign outflows and the unwinding trade in major Asian peers might continue to undermine the INR. 
• All eyes will be on the RBI interest rate decision on Thursday.

The Indian Rupee (INR) recovers on Tuesday amid the decline of the US Dollar (USD). The upside of the local currency might be limited as risk sentiment is likely to influence the markets. On Monday, the INR fell to an all-time low at the open as traders feared a looming US recession that could lead to further foreign outflows from India and other emerging markets. Additionally, the unwinding trade amid a rally in the Chinese Yuan and Japanese Yen could create a headwind for the Indian Rupee. 

Nonetheless, the expectations of deeper rate cuts by the Federal Reserve (Fed) could exert some selling pressure on the Greenback and drag the pair lower. Market participants expect the US central bank to cut its interest rate by 50 basis points (bps) in both September and November and another quarter-point cut in December. Traders will closely monitor the Reserve Bank of India (RBI) interest rate decision on Thursday. The RBI is anticipated to keep the repo rate unchanged at 6.5% due to risks from higher food inflation.

Daily Digest Market Movers: Indian Rupee rebounds, potential upside seems limited

• Indian HSBC Services PMI declined to 60.3 in July from 60.5 in the previous reading, weaker than the 61.6 estimated. 
• The US ISM Service Purchasing Managers Index (PMI) rose to 51.4 in July from 48.8 in June. This figure came in better than the estimation of 51.0.
• The US S&P Global Composite PMI was worse than expected, declining to 54.3 in July versus 55 prior. 
• Chicago Fed President Austan Goolsbee said on Monday that the US central bank would respond if economic or financial conditions deteriorate.
• San Francisco Fed President Mary Daly stated that the central bank will monitor if the next job market report reflects the same dynamic or reverses, adding that the Fed is prepared to act as they get more information.
• Financial markets are now pricing in nearly 85% possibility that the Fed will cut the rate by 50 basis points (bps) in September, up from only 11.5% last week, according to the CME FedWatch Tool.

Technical analysis: USD/INR’s constructive bias remains in place

Indian Rupee trades on a stronger note on the day. The bullish outlook of the USD/INR pair remains strong on the daily chart, with the pair holding above the key 100-day Exponential Moving Average (EMA) and being underpinned by the uptrend line since June 3. However, the 14-day Relative Strength Index (RSI) showed the overbought condition above the 70.0 zone, indicating that further consolidation cannot be ruled out before positioning for any near-term USD/INR appreciation.

The immediate resistance level for the pair emerges at the 84.00 psychological level. Any follow-through buying above the mentioned level will see a rally to 84.50. 

On the flip side, the initial downside target is seen at the uptrend line around 83.78. A break below this level could pave the way to 83.51, a low of July 12. The crucial contention level is located at 83.47, the 100-day EMA.