The USD/INR exchange rate surged to 87.80 last week after Donald Trump unveiled his tariffs against India. It then quickly erased those gains and moved to a low of 87.20 after the weak US jobs numbers. It remains 4.10% above the lowest point this year. 

US and India trade relations

The main catalyst for the USD/INR exchange rate was the recently escalated trade war between the United States and India. In a statement, Trump said that he would impose a 25% tariff on most Indian goods shipped to the US.

At the same time, Trump threatened additional penalties for India’s continued trade relations with India. These levies are part of Lindsey Graham’s tariff package bill, which will impose secondary tariffs on countries that continue to do business with Russia. 

Trump has also threatened another tariff on India because it is a member of BRICS. Altogether, these tariffs will likely affect trade volume worth $129.2 billion.

India sold goods worth over $77 billion to the US last year, while the US sold goods worth $41.8 billion. Therefore, the USD/INR exchange rate will react to any trade-related news and the start of these tariffs. 

Read more: US needs ‘more negotiations’ with India on trade ahead of Aug 1 tariff deadline, Greer says

RBI interest rate decision

The USD/INR exchange rate will also react to the upcoming interest rates by the Reserve Bank of India (RBI). 

This decision will come after the central bank delivered a higher-than-expected interest rate cut in its meeting in May. It brought interest rates from 6% to 5.5%.

Analysts have a mixed outlook on what to expect in this meeting. Some believe that the bank may decide to leave interest rates unchanged in this meeting. 

Many, however, expect the bank to cut rates by either 0.25% and 0.50% in this meeting because of Donald Trump’s tariffs and the fact that Indian inflation has been in a strong downtrend. 

The most recent data showed that the headline consumer inflation dropped to 2.1% in June, down from 4.26% in January. 

The RBI decision comes a few days after the Federal Reserve left interest rates unchanged and indicated that it will be data-dependent in its upcoming meetings.

Additionally, the USD/INR pair will continue reacting to the recent US nonfarm payrolls data. The data showed that the US added just 73,000 jobs in July.

USD/INR technical analysis

USD/INR chart by TradingView

The daily chart shows that the USD to INR exchange rate bounced back from a low of 83.77 in May to a high of 87.78 last week. It then plunged to the current 87.3, which is slightly above the key support level at 86,90, its highest point in June. 

The pair also pulled back sharply after approaching the crucial resistance level at 87.96, its highest point in February this year.

Therefore, the pair will likely drop and retest the support at 86.90 and then resume the uptrend. This pattern is known as a break-and-retest and is a common continuation sign. The bullish case is based on the fact that the pair formed an inverse head and shoulders pattern.

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