First, a roundup of what happened yesterday in the currency markets. The dollar-rupee pair closed at 71.44 on Wednesday and traded in the range of 71.36 to 71.71 levels during the day. Volatility remained influenced by the ongoing trade talks between the US and China. That reflected on offshore Yuan and in turn on the USD-INR pair.
Offshore yuan moved in the range of 7.0836 and 7.1127 levels. Brent Crude is stable at around $59/barrel. China had also threatened retaliation if the US enacts the Hong Kong Bill that would require an annual review of whether the city is sufficiently autonomous to justify its special trading status.
US retail sales fell for the first time in seven months for September to 0.3 percent compared with market expectations of a rise of 0.3 percent. However, retail sales data for the previous month was upwardly revised to 0.6 percent from 0.4 percent.
Will the US Fed cut rates?
A fall in sales was seen at gasoline stations, autos and parts dealers, building material and garden equipment stores while only in food services and drinking water, a rise happened. This data reinforced market expectations of the US monetary regulator Federal Reserve cutting rates by 25 bps rate in the coming FOMC meeting due on October 29-30.
On the UK, it is important to keep a watch on events unfolding from the EU summit, which begins today and will end tomorrow. It will keep the pound-dollar pair volatile as it will initially just react on headlines.
The parliament there will be holding a special weekend session on Saturday. Expect debates with respect to alternative routes and also a possibility of a vote on any deal.
Is a deal in the works?
Any deal thought about would need to go through three steps. First, approval needs to be taken from Cabinet, then it needs to be agreed by all 27 EU member states and finally, it would then need to get through the Parliament.
There have been positive comments from EU Council President Donald Tusk that the basic foundation of an agreement on Brexit was ready and that it could materialise within hours. French President Macron is also expecting Brexit deal to be signed off tomorrow.
This pushed GBP-USD pair towards 1.2877 levels, though the entire day it was very volatile moving in the range of 1.2655 to 1.2877 levels basis on several comments. UK premier Boris Johnson is racing to secure a deal and keep members of his own Conservative Party and the DUP on side in order to take the UK out of the EU before October 31 deadline.
Reports that Germany might use emergency measures to counter any market panic from a hard Brexit, such as banning bets on falling share prices weighed on morale. The Euro had initially declined after data showed Eurozone inflation dropped to its slowest pace in nearly three years in September, more than previously estimated.
But later due to weaker US retail sales and development on the Brexit front of the EU and the UK getting closer to a deal, the Euro-dollar pair rallied towards 1.1085 levels from 1.1028 levels.
What is happening on the domestic front?
On the domestic front, RBI minutes needs to be closely watched. The minutes will be released on Friday as it can set the tone for further rate trajectory.
Considering all the points into consideration (US-China trade war, HK protest, Brexit developments and eyes on RBI policy minutes), positionally USD-INR is expected to remain in the range of 70.70 to 72.20, on a break on either side fresh view needs to be considered.
Kunal Sodhani is AVP, Global Trading Centre, Treasury, Shinhan Bank India.