The INR Value Recovers Ground as the Weakness of the US Dollar Becomes Evident

The Indian Rupee opened the session with a significant rebound, breaking a three-day streak of declines. The INR strengthened against the US dollar, with the USD/INR rate falling to 90.35, while the US Dollar Index (DXY) experienced a broader correction, hitting a three-week low of 98.86 in the previous session. This movement reflects a waning appetite for safe-haven assets, with the INR benefiting directly from reduced dominance of the US dollar in global markets.

Factors Affecting the INR: Weak Economic Data and Geopolitical Context

The US dollar’s decline was mainly driven by weakening US manufacturing activity data released earlier in the week. The December ISM Manufacturing PMI index further deteriorated, dropping to 47.9 from 48.2 the previous month, disappointing economists’ expectations of an improvement to 48.3. Sub-indices, including New Orders and Employment, also contracted, indicating persistent weakness in the US industrial sector. This macroeconomic data environment eroded confidence in the dollar’s strength, allowing the INR to benefit from the reduced dominance of the global reserve currency.

Meanwhile, the rupee remains exposed to structural pressures stemming from deteriorating US-India trade relations. In early January, US President Donald Trump hinted at further tariff increases on India if the country does not change its oil import policies from Russia, stating that “significant tariff hikes could occur if energy issues are not resolved.” Despite these critical factors, foreign investors moderated their withdrawals from Indian equities, with capital outflows on Monday significantly lower than the average of the previous three sessions: ₹36.25 crore versus a total of ₹3015.05 crore sold. This suggests a possible consolidation of the INR after recent pressures.

Geopolitical Situation and Its Impact on the Indian Rupee

The previous US dollar rally observed earlier in the week was triggered by escalating geopolitical tensions, including US military actions in Venezuela and the arrest of President Nicolás Maduro on drug trafficking charges. These events temporarily fueled risk aversion in markets, boosting the dollar’s appeal as a safe-haven currency. As risk sentiment eased in subsequent days, the INR benefited from a broad revaluation of emerging market currencies, showing an inverse dynamic compared to the initial movement of the week.

The Importance of US Employment Data for the Rupee Outlook

Market watchers will focus on the December Nonfarm Payrolls report, expected on Friday of that week, which is considered crucial for determining the future direction of the US dollar and, consequently, the INR. US employment data provide key insights into the health of the US labor market, a central factor in Federal Reserve monetary policy decisions.

In 2025, the US Federal Reserve has already implemented three interest rate cuts, bringing the target range to 3.50%-3.75% to support a slowing labor market. UBS has revised upward its expectations for further rate cuts, forecasting them for July and October of this year, after previously anticipating moves in January and September. The Swiss bank also expects the core Consumer Price Index (CPI) to increase by 44 basis points in December, 50 basis points in January, and 30 basis points in February, painting a complex picture for the Fed regarding the balance between supporting employment and controlling inflation.

On Wednesday of the same week, market participants will monitor data on ADP employment change, the December ISM Services PMI, and JOLTS job openings for November, collectively helping to shape the US employment outlook and, by extension, the INR’s prospects.

Technical Analysis of USD/INR: The Pair Maintains Dynamic Support

From a technical perspective, the USD/INR is trading around 90.3765, remaining above the 20-day exponential moving average (EMA), which is at 90.2305. This level continues to serve as a dynamic support, preserving the overall bullish trend despite the recent correction. Although the EMA slope has stabilized, price action continues to respect this support level, providing a technical anchor for the INR in the short term.

The 14-period Relative Strength Index (RSI) stands at 55.20, indicating balanced momentum and a neutral condition, with no signs of overbought conditions for the pair. This reading maintains a slightly constructive short-term outlook.

If the pair closes consistently above the short-term EMA, the INR could retest the all-time high of 91.55. Conversely, a daily close below the 20-day EMA would shift sentiment to a bearish scenario, potentially pushing the INR toward the December low of 89.50, completing a significant technical reversal.

(This technical analysis was developed with the support of advanced computational tools.)