The Indian Rupee reaches a new two-month high of around 86.95 against the US Dollar. This occurs amid tensions between Iran and Israel, as well as the Federal Reserve’s maintained interest rate range of 4.25%-4.50% for the fourth consecutive time.

The US Dollar Index hits a weekly high near 99.10. The conflict between Tel Aviv and Tehran, lasting for seven days, may escalate further, increasing tension worldwide. The US has mobilised defence equipment to the Middle East, aiming to protect its military bases.

Geopolitical Tensions Increase

Escalating geopolitical tensions boost demand for the safe-haven US Dollar, affecting the Rupee. The Rupee remains weak amid growing concerns over high Oil prices driven by conflict, impacting nations like India that heavily import Oil.

Expectations rise for potential Reserve Bank of India interest rate cuts due to moderate inflation pressures. The Fed leaves interest rates unchanged, while warning of possible tariff effects on inflation. GDP growth is revised down to 1.4% from 1.7%.

The Rupee weakens against major currencies, especially the Euro. The USD/INR maintains a bullish trend, with the 20-day EMA at 85.95 offering support, while the April high of 87.14 presents resistance.

Market Reactions and Forecasts

Following recent developments, we’re seeing the Indian Rupee attempting to balance between domestic policy signals and broader market pressures. The new two-month high around 86.95 against the US Dollar initially appears promising on the surface, but the picture becomes more complex once we factor in the surrounding variables. The rising uncertainty in the Middle East, particularly the hostilities involving Israel and Iran, is creating a chain reaction across global markets, especially in currencies with vulnerability to commodity imports.

Tensions in the region have entered their second week. With defence deployments now confirmed, particularly from the United States, traders will need to manage for the possibility of a prolonged conflict. What this does, as we’ve experienced before, is amplify demand for safe-haven assets. The Dollar, being one of the most immediate bolt-holes, has appreciated in response. The DXY climbing above 99 further anchors this movement—and continues to press lesser-traded currencies such as the Rupee into tighter corners.

Oil prices are, expectedly, firming under pressure. For economies like India’s, which rely extensively on imported energy, that resurgence in price amplifies trade deficits and stirs inflation risks. Even though current headline inflation remains within tolerable levels, the Reserve Bank’s hand may be nudged toward policy actions. These could go either way in due course—though softer CPI is fuelling speculation of a rate reduction. Still, that won’t materialise immediately; for traders, the hint is in positioning for potential carry shifts.

From our side of the table, we’re keeping a close eye on the Fed’s revised outlook. Growth projections have been dialled back—to 1.4%, down from 1.7%, and while the rate corridor remains steady at 4.25%-4.50%, there’s concern about how tariffs might shuffle inflation in the coming quarters. That’s something to factor in when lining up medium-term Dollar exposure; any jolt in core inflation could lead to the Fed turning back towards hikes sooner than expected, which would reverberate through emerging market currencies.

Technically, the current momentum remains with the US Dollar. The pair has established a clear support line via its 20-day exponential average around 85.95. On the upper end, April’s high near 87.14 gives us a potential inflection zone. For now, this leaves the pair in a neat trading band that offers structure for short-dated contracts.

Sentiment has also started showing some divergence with the Euro. As the Rupee drops further against European currencies, there’s a secondary risk via Euro cross-pairs. Focus here may shift from Dollar strength per se, to multi-directional weakness in the Rupee against more than one counterpart, which could challenge hedging strategies built solely around the USD/INR axis.

We are staying aligned with near-term support-resistance scenarios but remaining cautious. The balance between global inflation uncertainty, Oil volatility, and geopolitical risk makes this a period for tactically selective trades rather than broad directional bets. Traders should be watching for any signal of extended military involvement in the region, and any surprise tweaks in central bank language, before leaning into fresh positions.

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