Indian Rupee retreats as oil prices rally further

The Indian Rupee (INR) is retreating from a two-month high against the US Dollar, with USD/INR recovering toward 94.75 as renewed strength in oil prices weighs on the currency. The pair had fallen to a two-month low of 94.29 last week, but the impact of higher energy costs is now outweighing a softer US Dollar backdrop.

Rising oil prices are creating a challenging environment for many Asia ex-Japan currencies because of the region's dependence on energy imports. Higher crude prices can worsen the terms-of-trade position for net energy importers such as India and limit the scope for further currency appreciation.

Geopolitical tensions involving the US and Iran have added to supply concerns, while fragile traffic through the Strait of Hormuz is keeping oil-market risk premia elevated. Further gains in Brent could increase pressure on the Indian currency, with strategists watching the $102 area and potential extensions toward $108-$110 and $117.

Attention now turns to US CPI data for August, which could influence expectations for the Federal Reserve's next policy move. Current market pricing puts the probability of a Fed hike at the next meeting at around 58%, while some analysts argue that if the Fed moves this year, a hike could be more likely than a cut.

Technically, USD/INR trades near 94.75 and remains below the 20-period EMA at 95.13, keeping the near-term tone bearish. The RSI near 37 points to lingering downside pressure, although conditions are approaching oversold territory. A move above 95.13 could open the way for a corrective rebound, while 94.15 remains the key downside support.