Rupee Strengthened as Markets Return to Risk-On
Emerging-market currencies such as the Indian Rupee benefitted strongly at the start of the week as global stocks rallied. The reopening of the Shanghai Composite Index failed to provoke fresh turbulence while speculation of more monetary loosening to come from the Bank of Japan (BoJ) saw the Nikkei Index close up an impressive 7%.
Although Chinese trade data continued to demonstrate signs of slowdown, with imports contracting sharply on the year in January, this failed to particularly weigh on market sentiment. Consequently, with risk appetite on the rise, the GBP/INR exchange rate promptly returned to a downtrend on Monday.
Confidence in the strength of the Indian economy was somewhat muted by the latest WPI Inflation measure, which showed an unexpected drop from -0.73% to -0.90%. Negative inflation is likely to weigh heavily on the Rupee while denting India’s continued economic growth. Given that India was recently revealed to have overtaken China as the world’s fastest growing economy this weaker result did not seem to bode well.
However, as the January trade deficit was later shown to have narrowed far further than forecast from -11.66 billion to -7.64 billion US Dollars the impact of this more disappointing data was limited. As a smaller deficit reduces the exposure of the Indian economy to negative global headwinds traders received this news with relief, boosting the Rupee further.
Pound Weakened as UK Inflation Remains Muted
The appeal of the Pound, meanwhile, has been somewhat diminished this week as economists continue to dial back their estimates for the Bank of England’s (BoE) first move on monetary tightening. Given the more dovish nature of policymakers since the turn of the year, however, some predict that interest rates will not rise until 2020, a prospect that saw the GBP/INR exchange rate extend its downtrend.
Traders were initially encouraged by the January Consumer Price Index, though, as baseline inflation was confirmed to have risen to 0.3% on the year. While this remains a far cry from the BoE’s 2% target the Pound nevertheless strengthened sharply in response, before investors began to take a more bearish view.
Both the monthly baseline CPI and the annual core CPI proved rather more disappointing, showing larger dips in inflationary pressure than forecast. As this did not provide a particularly positive picture of the general outlook Sterling soon gave up its gains, slumping sharply across the board.
GBP/INR Hit Two-Week Low on Discouraging UK Employment Data
A meeting between Saudi Arabia and Russia helped to shore up the appeal of higher-risk currencies further on Tuesday, with investors encouraged by the possibility of oil prices imminently bottoming out on the back of a production cut. Investors were ultimately disappointed by the outcome of the meeting, which promised a production freeze conditional on the agreement of all major producers, which saw the Rupee weakened by reduced risk appetite.
UK employment data offered little incentive for traders to buy back into the Pound on Wednesday, as the ILO Unemployment Rate failed to dip and growth in average weekly earnings remained muted. As wage growth remains one of the key factors in the BoE’s monetary policy outlook this result seems to confirm that a rate hike is increasingly distant possibility. Consequently the GBP/INR exchange rate fell to a two-week low of 97.5950.
Despite this unimpressive domestic data, however, the Pound has since recovered some of its strength. This largely appears to be due to comments from German Chancellor Angela Merkel, who expressed support for the proposals to reform the UK’s relationship with the EU. As ‘Brexit’ uncertainty remains a downside pressure this endorsement helped to boost demand for Sterling.