Brexit-based developments weighed heavily on the Pound this week, with Theresa May taking an increasingly hard line of rhetoric. An apparent deterioration in relations between UK and EU officials prompted renewed Sterling softness, with the odds of the talks ending without a new trade deal rising sharply. With the Conservatives still considered to be on course to return to power with an increased majority markets are seeing increased jitters over the prospect of an acrimonious divorce.
Confidence in the Rupee strengthened sharply in response to March’s Indian infrastructure output report, which showed a surprising 5% increase on the year. This boosted optimism in underlying strength of the domestic economy, suggesting that the first quarter ended on a strong note. As Monday’s US data proved weaker-than-expected and oil prices remained under pressure the Rupee was set on bullish form.
Weakened Risk Appetite Weighs on Rupee
While the Federal Reserve left monetary policy unchanged, in line with market expectations, risk appetite faltered in the wake of Wednesday’s meeting. The tone of the accompanying statement proved more hawkish than investors had anticipated, raising the prospect of the Fed hiking interest rates in June. As a result the appeal of the Rupee weakened, offering the GBP INR exchange rate a fresh rallying point.
In spite of persistent political worries hanging over the Pound March’s raft of UK PMIs all surprised to the upside. A solid showing from the service sector was particularly welcome, given that the sector accounts for more than three quarters of the country’s economic activity. Although the details of the surveys showed a continued uptick in inflationary pressure and weakening consumer spending this was not enough to put Sterling on the back foot.
Dovish BoE Could Dampen Pound Demand
The GBP INR exchange rate is likely to see continued volatility ahead of Thursday’s Bank of England (BoE) policy meeting. While policymakers are not expected to make any changes at this juncture investors will still be interested to gauge the general outlook on monetary policy. If the BoE maintains its neutral to dovish tone then the Pound could come under fresh selling pressure, even though inflationary pressure is set to rise further over the coming months.
Demand for the Rupee could pick up next week with the release of the latest Indian inflation rate and production figures. If the domestic economy continues to demonstrate signs of solid growth then the GBP INR exchange rate could slump. However, following February’s sharp contraction in industrial and manufacturing output anything less than a significant rebound could leave the Rupee lacking in particular support. An uptick in inflation could also soften the emerging market currency, increasing the chances of further action from the Reserve Bank of India (RBI).