The dollar ended the week as the strongest currency, boosted by the fresh round of inflation data that led markets to reassess expectations around the Fed’s rate cuts.

The central theme of the financial markets last week was the increased uncertainty regarding the Fed’s policy loosening path, primarily stirred by fresh inflation data. The release of February’s CPI and PPI reports not only confirmed that the inflation battle in the US is far from over but also triggered notable responses across asset classes. Treasury yields staged a significant leap, taking the Dollar higher alongside.

The discourse in the markets is now centring around three critical facets of the Fed’s monetary easing path: the timing of the initial rate cut, the total number of cuts within the year, and the final stance of this cycle.

With the Fed having gone all-in during the end of 2023 meeting on rate cuts, markets will react violently if the possibility of a no-rate-cut scenario becomes more apparent. Today’s meeting also includes economic projections and it would be interesting to how the Fed would project inflation through 2024 and 2025.

In the domestic scene, the election dates have been announced – from 19th April to 1st June. One can expect that the Rupee will trade range bound until that period. While there are expectations of large inflows post-elections, if BJP comes back for a third term, the global scenario should also be amenable at that time in that the rate cut cycle should have started as expected. Even if there are going to be flows into India post-elections, the RBI might choose to absorb flows and build more reserves.

From a pure risk management perspective, the calm USDINR period is fraught with the risk that most companies become complacent and give up hedging completely. Historically, the longer the period of calm for the Rupee, the higher the subsequent volatility and risk. Given that the forward premium is also quite low, it is prudent for importers to continue with partial hedging, and exporters will be well served by using option structures such as range forwards and seagulls. The weekly range is expected to persist between 82.90 and 83.15 levels.