USD/INR falls for fifth straight trading day ahead of US inflation data

• USD/INR falls below 85.50, while the US Dollar steadies after the US and China reach a framework on a trade deal.
• The US inflation is expected to have grown at a faster pace in May.
• Higher foreign inflows and a likely decline in oil prices have strengthened the Indian Rupee.

The Indian Rupee (INR) posts a fresh weekly high near 85.43 against the US Dollar (USD) during European trading hours on Wednesday. The US Dollar trades calmly after the White House signaled a positive outcome from the two-day meeting between trade negotiators from the United States and China in London. The US Dollar Index (DXY), which gauges the Greenback’s value against six major currencies, ticks up to near 99.15.

US Secretary of Commerce Howard Lutnick told reporters that both nations reached a “framework” to implement the trade deal made in Geneva in May, if approved by President Donald Trump. Lutnick expressed confidence that China would curb non-tariff barriers on the export of “rare earth and magnets”, and Washington would also roll back export restrictions on sophisticated chips.

Meanwhile, the Chinese ministry has also expressed a positive outcome from trade talks with Washington and stated that the agreement will now be forwarded to President Xi Jinping for approval.

The US Dollar trades steadily after the US-China trade agreement, which was expected to perform strongly on de-escalation in trade tensions between the two nations. Analysts at National Australia Bank stated that the “devil is going to be in the details and importantly whether this can help to reestablish trust between President Xi and President Trump, which has clearly been broken since the Geneva Agreement was published”.

On the legislative front, the US Federal Appeals court has stated that tariffs imposed by Donald Trump relating to border negligence and those announced on so-called “Liberation Day” on April 2 will remain in effect until they get proven whether they are permissible under the emergency act or not. The next argument regarding the sustainability of the above-mentioned tariffs will take place on July 31.

Daily digest market movers: Indian Rupee outperforms US Dollar

• The Indian Rupee extends its winning streak for the fifth straight trading day on Wednesday against the US Dollar ahead of the US Consumer Price Index (CPI) data for May, which will be published at 12:30 GMT. 
• The US CPI report is expected to show that the headline inflation rose at a faster pace of 2.5% year-on-year, compared to a 2.3% growth seen in April. In the same period, the core CPI – which excludes volatile food and energy prices – accelerated to 2.9% from the prior reading of 2.8%. On month, the headline and the core CPI rose by 0.2% and 0.3% respectively.
• The scenario of high inflation growth would limit Federal Reserve (Fed) policymakers from lowering interest rates. However, soft inflation figures are unlikely to prompt officials to endorse early interest rate cuts, assuming they are more focused on stabilizing de-anchored consumer inflation expectations, fuelled by the implementation of new economic policies by US President Trump.
• According to the CME FedWatch tool, the Fed will not reduce interest rates in the June and July policy meetings.
• In the Asian region, strong foreign inflows and a likely decline in the Oil price has strengthened the Indian Rupee. On Tuesday, the data from Indian exchanges showed that Foreign Institutional Investors (FIIs) were net buyers, pumping Rs 2,301.87 crore into equity markets.
• Meanwhile, the US Energy Information Administration (EIA) cites demand concerns and rising output as factors that could lead to a decline in the international benchmark Brent crude to $61/bbl by the end of 2025. Lower Oil prices bode well for the INR, given that India is one of the world's leading importers.
• On the economic front, investors await the release of the Indian CPI data for May, scheduled for Thursday. Inflationary pressures are expected to have risen by 3% year-on-year, slower than the 3.16% growth seen in April.
• Signs of cooling price pressures would prompt market expectations that the Reserve Bank of India (RBI) could reduce interest rates again. In last week’s policy meeting, the RBI unexpectedly slashed the Repo Rate by 50 basis points (bps) to 5.5% and guided little room for further monetary policy expansion.

Technical Analysis: USD/INR struggles to hold 20-day EMA

The USD/INR pair refreshes the weekly low near 85.47 during Asian trading hours on Wednesday. The outlook of the pair is uncertain as it struggles to hold the 20-day Exponential Moving Average (EMA), which trades around 85.49.

The 14-day Relative Strength Index (RSI) hovers inside the 40.00-60.00 range, indicating a sideways trend.

Looking down, the June 3 low of 85.30 is a key support level for the major. A downside break below the same could expose it to the May 26 low of 84.78. On the upside, the pair could revisit an over 11-week high around 86.70 after breaking above the May 22 high of 86.10.