Powell reinstated hawkish comments at Jackson Hole

Indian Rupee spot edged closer to an all-time low of 80.06 touched in July in the previous week, amid a stronger greenback, sell-off in equity markets and elevated crude oil prices. Weakness in Rupee can be mainly attributed to macro factors like Fed front loading rate hikes, leading to sharp surge in US treasury yields and dollar index. Meanwhile, domestic inflation eased to a five month low of 7.69% in July, providing some respite for Rupee. India’s foreign exchange reserves fell by $6.69 billion to $564.05 billion in the week ended 19th August, the lowest levels since October 2020, latest data released by the Reserve Bank of India showed.

The greenback pared early losses and closed higher in the previous week after hawkish comments from Powell at the Jackson Hole Symposium fuelled dollar rally. During his speech, Fed Chair Powell noted that the central bank remains determined in bringing inflation down to 2%, and that restoring price stability could require borrowing costs remain elevated for a prolonged time and dent growth. Short term yields in US skyrocketed with 2 year treasury yields surging above 3.4%, the highest levels since 2007 on expectations of higher Fed funds rate in the near future. Weakness in the index heavy weight Euro also aids the greenback. Euro fell below $1 parity as the bloc’s economic outlook deteriorates amid a looming recession owing to the ongoing energy crisis.

Outlook for the week: US Labour data in focus

Indian Rupee spot might continue to weaken amid broad dollar strength, while, higher crude oil prices are a double whammy for the net importers domestic currency. Crude prices might stay elevated for the week ahead of OPEC+ meeting, raising concerns of further widening of domestic trade deficit for August, which is already at record levels. Dollar index might continue to rise on expectations of aggressive rate hikes by Fed, energy crisis in Eurozone and safe haven buying amid a looming slowdown. Powell?s latest comments improved the conviction that Fed might keep rates higher for longer, against market expectations of a dovish pivot in early 2023, even if that tips the economy into a technical recession. Money markets are pricing in another 75 bps rate hike for September, 50 bps for November and a 25 bps for December, taking Fed funds to 3.75%-4% target range. Domestic Fiscal deficit, GDP numbers and infrastructure output data are due this week. Speeches by several Fed officials as well as the US labour report and ISM manufacturing PMI will be the major focus.