Indian rupee spot depreciated by 0.05 paisa and closed at 83.12  vs previous week’s close of 83.07

Rupee moved in a very tight range during the truncated week as investors await key economic numbers from US to get more clarity on the future interest rate path. It was a muted week for the Indian forex market with only three trading sessions. The rupee has hovered in a tight band between 83.05 and 83.18 over the past five trading sessions. Following the “bit of excitement”, USDINR is now back to a narrow intraday range of 6-10 paisa

The strength in the dollar and rise in the US treasury yields helped the dollar to holds the edge over the rupee. Further, outflow of funds from the domestic equities and higher crude oil prices also checked the rupee to appreciate beyond the 83.00 mark.

While the rupee had rallied sharply to 82.77 earlier this month, it has since shed much of its gains, pressured by equity outflows and a broad pickup in the dollar strength, amid paring of aggressive US rate cut expectations.

The Fed in December surprised markets by taking a dovish tone and projecting 75 basis points of rate cuts in 2024, resulting in markets pricing in early and steep easing, with a cut expected as early as March. But since then, strong economic data and pushback from central bankers have prompted traders to adjust expectations.

Dollar Index gains to 103.43, up by 0.14 %  last week against previous week’s close of 103.29

Dollar index strengthened for the second week as the Federal Reserve’s preferred inflation gauge showed cooling prices despite a resilient consumer spending outlook. The index is set for a 2% gain in January as traders temper expectations of early and deep US interest rate cuts.

Even though there are no major panic events on the horizon now, US regional bank issues and unforeseen events in China could come to keep markets jittery in the coming months.  

The Fed in December surprised markets by taking a dovish tilt, resulting in traders pricing in aggressive easing, with a cut expected as early as March. But since then, strong economic data and pushback from central bankers have prompted traders to adjust expectations.

Markets are currently pricing in a 49% chance of a rate cut in March, the CME FedWatch tool showed, compared with an 86% chance at the end of December.

The Fed currently faces a U.S. economic picture that sees economic activity still holding up better than expected even though inflation measures continue to move down. That hardly suggests that the economy urgently needs rate cuts.

Overseas FX markets remained volatile amid two central bank’s policy decisions and a bunch of economic data. The Euro remained under pressure as traders took the ECB President Christine Lagarde’s comment as a signal of rate cuts, which begin sooner, and are now pricing in a nearly 90% chance for easing to begin in April.

What to Watch: Investor attention this week will squarely be on the Federal Reserve’s policy announcement on Wednesday, with the central bank widely expected to stand pat on rates, leaving the spotlight on Fed Chair Jerome Powell’s comments. February 1. will also be in focus for equity market momentum which indirectly impact Rupee’s foreign inflows.

What lies ahead?

Rupee spot (CMP: 83.15) continue to bein range, focus on FOMC this week critical

The FOMC meeting starting this week has become critical for markets, in the light of the unexpected dovish tilt of the last meeting. Given the high expectations around rate cuts, the FOMC has to now signal a solid rate cut plan to keep markets happy.

Investor attention this week will squarely be on the Federal Reserve’s two-day policy meeting which starts on Tuesday, with the central bank widely expected to stand pat on rates, leaving the spotlight all on Fed Chair Jerome Powell and his comments.

USDINR’s base case scenario is of a range-bound behavior as long as no black swan events appear on the horizon, unless the Fed far away from rate cut signaling. USDINR spot is expected to trade between 83.00 to 83.25 for this week as well. The month-end dollar demand and policy decisions from Federal Reserves could bring some price volatility in the coming days.

The sentiments remain favorable for the dollar versus the rupee amid risk-averse sentiments and foreign fund outflows. Meanwhile, investors will remain cautious ahead of key Union budget on 1st February.

Beyond the Fed, investors will also watch for a slew of economic data including a U.S. payrolls report that will help gauge the strength of labour market.