USD/PKR: Rupee outlook ahead of Pakistan election

The USD/PKR is one of the top currency pairs to watch this week as Pakistan goes to the closely-watched general election. The Pakistani rupee has strengthened to 279 against the US dollar. It has risen by almost 10% from its lowest point in 2023.

One of the most contentious and divisive elections of the year will happen on Thursday when millions of people will vote in Pakistan. The top contenders at the presidential level are Nawaz Sharif, Bilawal Zardari, and Shehbaz Sharif.

This election will be important because, Imran Khan, the former president has been jailed for years and has been barred from contending. It is unclear whether his party, PTI, will win the election this week. It is also important because Pakistan’s opposition has warned about threats from government officials.

Pakistan’s election comes at a time when the country is implementing a reform process that is supported by the IMF. In January, the government received $700 million from the IMF as part of the bigger $3 billion bailout.

The bailout, together with the recent crackdown on forex dealers, explains why the USD/PKR pair has retreated in the past few months even as the US dollar strength continued. However, the risk is that IMF’s bailout is expected to end in March, putting its resources at substantial risk.

Therefore, the rupee rally will hinge on whether the new administration will be able to negotiate a new package by the IMF.

Pakistan’s political mess has seen it left behind by India, its neighbour. India has emerged as one of the fastest-growing economies in the world. According to the OECD, India’s economic growth is expected to grow by 6.2% this year, higher than the global average of 3.2%.

The USD to rupee peaked at 307.20 in 2023 as default risks rose. Since then, the actions of the government and the IMF have helped it retreat to about 280, a move that has also helped ease inflation in Pakistan, which still stands at 30%.

The pair has also pulled back from its November high of 288.46 and moved below the 25-day and 50-day EMA. It is now nearing the important support level at 275.78, its lowest point in October last year. Therefore, there is a likelihood that the Pakistani rupee will do well in this quarter. In the long-term, however, the USD/PKR will likely rebound and retest the resistance at 288.48.

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