Indian Rupee corrects from two-month high as oil prices extend rally

The Indian Rupee (INR) receded from its two-month peak against the US Dollar (USD) on Tuesday. The USD/INR pair rebounded to approximately 94.68, from its two-month trough of 94.29, as the effect of higher oil prices on the pair appeared to surpass the lower US Dollar, which faced pressure due to uncertainty ahead of the US Consumer Price Index (CPI) data scheduled for Friday.

As of now, the US Dollar Index (DXY), which measures the Greenback's value against six major currencies, is trading 0.1% lower, nearing 98.80. The MCX Crude Oil contract, expiring on September 21, rose by 0.6% to near Rs. 8,818, its highest level since May 22. According to OCBC, the renewed increase in oil prices and higher US Treasury yields could pose a "unfavorable backdrop for much of Asia ex-Japan (AXJ) given the region's reliance on energy imports" and might "curb the extent of FX appreciation even if the broader USD stays contained."

Financial markets anticipate further oil price hikes due to ongoing hostilities between the US and Iran. Societe Generale strategists stated that Brent oil has "crossed a multi-month descending trend line and is gradually advancing toward the July peak around $102." They predict that a move above $102 could push the uptrend toward the next levels of $108/$110 and $117, which may intensify the strain on the Indian currency.

Commerzbank analysts warn that the recent geopolitical escalation has significantly heightened supply risks, noting that observable traffic via the Strait was sparse over the weekend, even though some tankers continued to transit with tracking systems either disabled or under military protection, highlighting the fragility and opacity of current flow dynamics.

This week, the primary focus will be on the US CPI data for August, which could reshape the Federal Reserve's (Fed) interest rate expectations. TD Securities anticipates that this week's inflation data will be "subdued enough to keep the Fed on hold," although they emphasize that "the PCE translation will be key" in shaping the policy outlook.

They expect the Fed "to remain on hold over our forecast horizon," stating that while "inflation should remain high for the rest of the year, and the labor market has stabilized," these factors allow the FOMC to "shift focus to its inflation mandate." TD Securities notes that if policymakers do adjust rates, "if the Fed were to move this year, we believe that move is more likely to be a hike than a cut."

Currently, the CME FedWatch tool indicates that the probability of the Fed raising interest rates at the upcoming meeting is 58.4%. The USD/INR is trading at 94.69, maintaining a bearish outlook as it remains below the nine-period exponential moving average (EMA) at 94.8537. The pair faces resistance at the 9-period EMA at 94.8537, which bears must reclaim to alleviate immediate selling pressure and allow for a corrective bounce. The two-month low at 94.29 serves as the primary support level.