On Wednesday, the Reserve Bank of India holds its next policy meeting with an interest rate decision due at 12:30 AM EDT.
Though a hike of anywhere between 25 and 50 basis points is anticipated, the increase itself is a foregone conclusion since the central bank has already characterized its next decision as a "no brainer." The country's currency, the rupee has also signaled that the rate hike is already priced in, by hitting a new, all-time low vs the US dollar.
The technical picture for the USD/INR shows there could be additional new lows ahead for the currency.
The USD completed a Falling Flag versus the INR. The upside breakout, which occurred at the end of the range for the pair, followed a sharp uptake in price, indicating ongoing bullish interest in the pair.
The dynamic driving this pattern is that of traders rushing to lock in profits. The sharp rally is caused by quick cash-outs before the market trims potential profits, leaving traders who didn't take advantage of the opportunity angry with themselves. The range provides them with some breathing space and time for further contemplation about where to go next.
The fact that prices didn't fall significantly during the ranging period—even as some traders were selling out their positions—indicates there was continuous demand from other traders. That's why the body of the flag is characterized by a crowded trade; it shows early bulls unloading even as later bulls pick up all the slack.
The upside breakout that followed demonstrates that the later bulls absorbed all available supply and remained willing to up the ante as they searched for more discriminating sellers at higher prices.
This pattern is the market equivalent of a slingshot. The range within the body is like a tightening coil, and the breakout is the release.
A short squeeze by traders on the wrong side of the trade is expected to help bulls with the next leg up, as the early bulls regret exiting this winning position and thus return to the market with gusto. Even cautious traders who didn't identify a clear trend now have it in sight and are coming back in droves.
Trading Strategies
Conservative traders should wait for the price to settle after the interest rate decision.
Moderate traders would enter a long position if the price retests today's 77.63 lows.
Aggressive traders could enter a long position now.
Trade Sample – Aggressive Long Position
- Entry: 77.75
- Stop-Loss: 77.50
- Risk: 25 pips
- Target: 78.75
- Reward: 100 pips
- Risk-Reward Ratio: 1:4