Weekly Currency Blog

Rupee and Dollar Index outlook

Markets seem to estimate that the economy currently is in a favourable zone with strong chances of soft landing, and the Fed will eventually cut rates this year. Good economic data is negative for risk appetite and positive for Dollar strength in this market.

The Yen was the top performer last week due to talk of a Bank of Canada rate hike. This boosted expectations of policy tightening but uncertainty remains about timing and future increases. The Euro was second, supported by high inflation. The Dollar came third, its rise limited by poor economic data.

Recent US economic data suggests a dovish stance for the Fed, leaning towards rate cuts in the first half of the year. While inflation is aligning with expectations, the ISM Manufacturing Index showed a downturn, indicating a prolonged contraction in manufacturing. Consumer sentiment also declined, reinforcing the outlook for rate cuts. Fed funds futures now indicate a nearly 65% chance of a rate cut in June.

Rupee ended positive against the US dollar for the second straight week, supported by robust domestic macroeconomic data and foreigners’ inflow. Foreigners continue to pile into the nation’s debt market with inflows at $4.9b in the first two months of the year.

Rupee remains tethered and is expected to remain so in the short term. Inflationary pressures continue to persist, but not enough to disrupt rate expectations. The economic resilience has surprised even the most optimistic of market participants and has given risk assets a solid base to zoom higher if rate cuts become a reality. While underlying risks remain extremely relevant, the odds are in favor of a proactive rate cut cycle from the Fed keeping the Dollar away from a runaway strength. The Rupee remains at an advantage.

The rupee also benefited from optimism sparked by data showing India’s GDP growth in the October-December quarter far exceeded expectations, with the economy expanding by 8.4%, against the 6.6%.

The short-term outlook for the rupee is moderately positive amid strong macro data, a recorded high equity market, and positive overseas inflow. However, the uptick in crude oil prices and the fact that the RBI continues to build FX reserves act as headwinds for the local unit. The spot USDINR range is 82.50 to 83.25.

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