USD/INR pares earlier gains after softer US PPI data for May

• USD/INR edges slightly higher on Thursday after a four-day losing streak..
• US tariff threats make a comeback as US President Trump threatens to send letters to trading partners outlining the terms of trade.
• Rising probabilities of a Fed rate cut in September could weigh on the USD and help limit further USD/INR gains.

The Indian Rupee (INR) recovers some of the initial losses against the US Dollar (USD) ahead of the American session on Thursday as markets digest the latest release of the US Producer Price Index (PPI) report for May. Still, the USD/INR pair edges higher on the day, trading above 85.50 at the time of writing after four consecutive days of losses, 

The PPI, coming in overall softer than expected, helps reaffirm expectations that the Federal Reserve (Fed) may cut the interest rate in September. 

The headline PPI figure for May came in at 2.6% (YoY), in line with expectations and slightly higher than the revised 2.5% reading in April. Meanwhile, the core PPI figure, which excludes food and energy prices, printed at 3%, below the 3.1% forecast and down from 3.2% in April.

Following a softer US Consumer Price Index (CPI) report on Wednesday, which showed signs of easing inflation in the US, expectations for a Fed interest rate cut in September have increased. Since the Fed has maintained a restrictive monetary policy stance relative to other central banks throughout the year, prospects of lower interest rates make the USD less attractive, limiting the USD/INR advance. 

For emerging market currencies, such as the Indian Rupee, this presents an opportunity to capitalize on the higher yield differentials found in developing nations.

An additional catalyst for the USD/INR pair is the reemergence of tariff threats, which came into focus after US President Donald Trump stated on Wednesday that letters would soon be sent to its global peers. 

Reuters reported on the comments, which included remarks such as, "We're rocking in terms of deals," and "We're dealing with quite a few countries and they all want to make a deal with us." This was followed by his statement that "At a certain point, we're just going to send letters out ... saying, 'This is the deal. You can take it, or you can leave it.'".

The combination of easing inflation in the US and trade uncertainty due to Trump's tariffs is viewed as an additional threat to the USD, supporting the use of alternative currencies. However, despite the broad-based USD weakness, USD/INR has failed to gain traction below the psychological level of 85.00 and slightly recovers on Thursday.