After a strong performance in 2016 on the back of a rebound in energy prices and improving fundamentals, the Russian Ruble is poised to see the pace of gains ebb throughout 2017 as the Central Bank reacts to declining inflation. With the latest figures showing a sustained deceleration in the pace of consumer price gains to the lowest point since 2012, pressure will mount to reduce interest rates and help stimulate growth.

Aside from evolving Russian conditions, the US dollar remains in the spotlight ahead of the upcoming inauguration of President-elect Donald Trump, potentially derailing any further losses in USDRUB. Although the dollar has been subject to significant profit-taking from the start of 2017, there are signs that the selloff is gradually easing, paving the way for a continuation of the currency’s uptrend against major peers. For USDRUB, it could be an early sign that the prevailing downtrend will face a number of upcoming tests.

Russian Inflation Retreats

Economists have marveled at the Russian recovery which has shown surprises at nearly each and every turn. The best evidence of this is the market’s reaction to improving fundamentals considering the Ruble’s 19.68% appreciation against the US dollar over the last 52-weeks. Russia received another bit of cheerful news on Tuesday with the announcement that annualized headline inflation tapered to 5.40% during the month of December.Considering its current trajectory, inflation is on track to meet the Central Bank’s target, with Prime Minister Dmitry Medvedev stating that “inflation of 4.00% this year is quite possible.”

With inflation falling, the Central Bank will have greater scope to move forward with reducing interest rates even further from current levels. One of the harmful side-effects of sanctions and the subsequent losses in the Ruble was that the only measure that contained that losses was a spectacular hike of interest rates.Now that upside consumer price pressures are fading, any moves to drop interest rates could be negative for the Ruble. At present, a one hundred basis point rate cut from 10.00% to 9.00% is forecast during the first quarter of the year, a move that could trigger some softness in the Ruble.

Do Not Underestimate the Dollar

Aside from prospective rate cuts weighing on the Ruble, the US dollar might also find itself back on the climb following a recent correction. Proposed fiscal measures and Fed officials whistling a more hawkish tune could all conspire to see rates rise faster than initially anticipated, helping to catalyze further gains in the US dollar medium-term. The gradually improving outlook for business is also adding an optimistic tone that may see USDRUB correct higher after a recent spate of losses.However, aside from the dollar, an eye should be kept on oil prices. Should recent gains in crude begin to ebb, the Ruble may find itself under renewed pressure to the downside.

Although the correlation between the Ruble and oil prices has eased to -0.4699, implying a looser inverse relationship, should the correlation continue to break down, it suggests that the USDRUB pair would be pulling away from its sensitivity to oil prices gradually.After reaching the highest point versus the US dollar since 2015 on Tuesday, USDRUB has since snapped higher, implying some potential buying pressure.Adding to this near-term bullish bias are momentum indicators like the stochastic oscillator rebounding from below the oversold threshold. With that in mind, the target on the upside is former support at 61.6675 which formerly stood as the bottom of a multi-month horizontal range.

The bottom of the broken horizontal range nearly coincides with the 50-day moving average, which is trending lower above the price action and acting as resistance. Should this level be crossed, the next level to keep an eye on is the 200-day moving average which has also been acting as even stronger resistance. However, any candlestick close above the 200-DMA might be considered bullish, putting the next upside target for the USDRUB pair at resistance of 67.1295 over the medium-term with any move higher signaling a trend reversal. On the downside, 58.7282 is the level to watch, with any break below a continuation of the prevailing downward trend.

What Binary Options Traders Should Watch For

The next major upcoming events from Russia that investors should be watching starts with the end of month report on annualized gross domestic product for 2016, with expectations for growth of 0.50% before the Russian Central Bank meets on February 3rd to likely decide on easing interest rates. Any such announcement is likely to negatively impact the Ruble, especially if further rate cuts are telegraphed to market participants.

From the perspective of the US dollar, the key items to monitor include upcoming policy speeches from FOMC members, Federal Reserve Chair Janet Yellen, and of course, Donald Trump.Inflation figures due out the following week may give credence to additional rate hikes from the Central Bank in the coming months while advance GDP figures for the fourth quarter due on January 27th will be the final point of importance before the February 1st interest rate decision from the FOMC.Keeping these factors in mind, a further convergence of interest rates for Russia and the United States would be broadly positive for USDRUB.