Indian rupee loses all intervention gains as oil climbs

Fundamental view

USD:

Despite a higher-than-expected monthly core inflation reading, the US dollar weakened on Friday. This was an odd response, as the data pushed up expectations for the Fed to raise rates, with traders now pricing in a 93% chance of a hike tomorrow.

Additionally, rising oil prices are fueling inflation concerns, and with no resolution in sight, the Fed could become even more hawkish. The unusual reaction later dissipated, and the dollar climbed to a fresh weekly high.

The FOMC decision tomorrow is the main event, with a 25-basis-point hike expected. Such a move would be the first since 2023. Traders will watch for any unexpectedly hawkish signals, which could strengthen the dollar through a more aggressive repricing of rate expectations.

Another key focus is the situation in the Middle East, as oil prices keep climbing and stoke inflation worries amid intensifying disruptions and supply anxieties. Oil has been a major market driver lately, so any reduction in Middle East tensions could drag oil prices down and prompt a dovish repricing, which would put downward pressure on the dollar.

Currently, the fundamentals favor the dollar, and it would probably require a Middle East de-escalation or a dovish Fed to alter the outlook.

INR:

For the INR, the rupee had recently moved independently of oil prices after several RBI interventions drove it up. However, those advances were wiped out, as intervention alone cannot succeed without underlying fundamental changes.

In recent days, the rupee has declined further as oil prices surge. This is detrimental to the rupee because India imports the majority of its crude oil; a heftier oil bill boosts dollar demand, expands the trade deficit, and weighs on the INR.

Over the short term, the rupee will remain influenced by oil prices and the shifting expectations of Fed rate policy. Consequently, the pair could stay in its broad range for an extended period until a US-Iran deal is reached and the Strait of Hormuz reopens.

On the longer view, the rupee is in a structurally bearish trend versus the dollar, so investors will keep seeking entry points near key technical levels to drive the pair to further highs.

USDINR technical analysis – daily timeframe

USDINR has erased all the gains from the RBI interventions and is now trading at the key 96.10 resistance. Sellers may enter here with risk above that level, aiming for a pullback to the 95.10 support. Buyers, conversely, hope for a breakout above resistance to extend bullish bets toward 97.30.

USDINR technical analysis – 4-hour timeframe

An upward trendline marks the bullish momentum on the 4-hour chart. A pullback to this line would likely draw buyers, with risk below it, to continue pushing for new highs. Sellers, meanwhile, would target a break below the trendline to add bearish positions toward 95.10.

USDINR technical analysis – 1-hour timeframe

On the 1-hour chart, buyers have a better risk-reward near the trendline, while sellers await a break lower to open the path for fresh declines.

Upcoming catalysts

The FOMC rate decision is scheduled for tomorrow. Thursday will bring US jobless claims data. Traders will also monitor Middle East developments closely.