Indian Rupee drops as oil prices extend recovery, downside seems limited

The Indian Rupee (INR) has experienced a drop against the US Dollar (USD) at the beginning of the week. This decline comes as oil prices continue to recover and the USD regains strength following a weak Friday. On August 19, MCX Crude Oil futures were trading above 1% higher at Rs. 7,500. Currencies from nations that heavily rely on oil imports, such as India, tend to underperform in a high-oil-price environment.

At the time of reporting, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, rose by 0.1% to near 99.70. Heightened uncertainty over the Strait of Hormuz's potential reopening has also contributed to the rise in oil prices. On the weekend, the Iranian Foreign Ministry spokesperson, Abbas Araghchi, stated that Tehran demands reparations from the United States before allowing navigation through the Hormuz.

Furthermore, continuous military attacks by Iran-backed Houthis on Saudi Arabian oil tankers have raised concerns about potential global supply disruptions. The US Dollar has rebounded at the start of the week as higher oil prices have taken away global inflation expectations. However, there is uncertainty about whether the USD will maintain this recovery, as traders have reduced their bets for a Federal Reserve (Fed) interest rate hike during the September meeting.

The odds of a Fed rate increase in September have dropped from 67% to 46% according to the CME FedWatch tool. Financial market participants have adjusted their expectations for a hawkish Fed based on rising labor market concerns. On Friday, the US Nonfarm Payrolls (NFP) report for July showed that employers cut 23K jobs, while the NFP was revised down to 20K from the initial 57K.

This weak US employment data led to a significant decline in the US Dollar, bringing the USD Index to a near-eight-week low at 99.40. A potential resumption of the USD’s decline could limit the downside in USD/INR. On the daily chart, USD/INR is trading at 95.30, with a mild bearish bias as it remains below the 20-day Exponential Moving Average (EMA) at 95.53.

The pair has struggled to regain this dynamic barrier, suggesting upside attempts are currently limited, while the Relative Strength Index (RSI) around 45 indicates subdued momentum rather than an oversold condition. The immediate resistance level is the 20-day EMA near 95.53, and a break above this level would help alleviate the current downside bias.

If the pair fails to hold the August 5 low at 94.83, it could slide towards the June low at 94.15. Factors such as oil prices, the value of the USD, foreign investment levels, and interventions by the Reserve Bank of India (RBI) play a crucial role in determining the Rupee's value.