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GBP INR Exchange Rate Trends Tightly as UK Wage Squeeze Looms

May 16, 2017 - Written by Minesh Chaudhari

UK data has devalued the Pound today, causing a tight trending in the GBP INR exchange rate. UK inflation rate figures have caused this downtrend, despite rising above forecasts from 2.3% to 2.7%.

The rise in inflation comes at a time of glacial wage growth, which has raised fresh fears of a wage squeeze damaging UK economic growth. Responding to the news was Resolution Foundation Chief Economist Matt Whittaker;

‘Having hovered close to zero back in 2015, inflation has really picked up in 2017, doubling in the last six months alone and now at its highest level for almost four years. As a result, wages are falling again. Coming so soon after the deep post-crisis pay squeeze, this marks a new chapter in a truly terrible decade for pay, the worst in over two centuries. Additionally, higher inflation will also mean that the four-year freeze in working age benefits will really be starting to bite for millions of low and middle income families’.

Incoming UK data releases could further weaken the Pound, as they will cover employment, earnings and retail sales.

Wednesday’s key UK data releases will include April’s jobless claims, the March unemployment rate and average earnings, also for March.

Claims are forecast to grow slowly, while unemployment is predicted to remain at 4.7%. Crucially, however, earnings with and without bonuses are not forecast to rise near the 2.7% inflation rate.

This outcome could exacerbate fears of a wage squeeze, which may result in a sharp GBP downturn. If wage growth increases by more than expected, however, then the Pound’s losses may be lessened.

The Rupee has traded up at 0.0121 against the Pound today, a weekly high but a far cry from the high of 0.0125 seen in early April. The latest economic news saw April’s trade deficit expand, from -10.44bn to -13.25bn.

More positively, a recent Morgan Stanley report has estimated that India is entering a ‘productive growth phase’. Morgan Stanley researchers predict that growth will rise by 7.9% by December, a step up from the 7% GDP figure recorded for Q4 2016.

Demand for the Rupee could be shifted by outside influences this week, given that Indian economic data is in extremely short supply.

Commodities news may raise Rupee demand, if the price of oil suddenly falls sharply; lower oil costs make it cheaper for India to import the resource. That said, the recent pattern has seen a stable rise in the price of crude since early May, so the Rupee may get no support from this area.

Elsewhere, US news may also impact the Rupee’s value. If an ongoing scandal about Donald Trump ‘leaking’ confidential information to Russian officials worsens, the US Dollar could fall in demand.

This could benefit the Rupee, as less confidence in USD can lead to greater trading of ‘riskier’ currencies like the INR.

The only Indian data release to speak of is Friday’s foreign exchange reserves figure for mid-May. Previously, a surplus of 375.7bn was recorded.

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