Rupee was caught between 82.90 and 82.60 levels in the previous week on the back of strong dollar and weak global market sentiments. Dollar gained strength amid jitters over debt ceiling negotiation and as Fitch put the country on credit watch for possible downgrade. Additionally, the US Dollar gained this week and stood near 2-months high as better-than-expected economic data from the US fueled the bets that interest rates may remain elevated for a longer than expected period.
We expect the Dollar index to face hurdles near 104.50 levels and correct back till 103.00 levels on optimism over US debt ceiling negotiations. US President Joe Biden and top congressional Republican Kevin McCarthy are likely to break the deal and raise the government’s $31.4 trillion debt ceiling before the so-called X-date on June 1st. Further, FOMC meeting minutes signaled a likely pause in the rate hike campaign in June. Some officials saw a need for more rate hikes while others expected a slowdown in growth to withdraw further tightening. Minutes also showed Fed staff continued to expect mild recession later this year.
The Dollar may retreat from its 2-month high ahead of a series of major economic data from the US. US ISM manufacturing PMI data is likely to show that activity in the sector contracted for the 7th consecutive month. Further, Non-farm payrolls data is projected to show that less number of jobs were added in the economy in May 2023 and average hourly earnings is likely to increase at a slower pace, indicating that the US labor market is cooling down, which could ease pressure on inflation.
Forecast for upcoming economic data from the US seems to signal that the economy is feeling the heat of rate hike and should support our view of a pause in rate hike from next meeting and possible rate cut by the end of the year. Even some of the policymakers were seen as having the opinion of hitting the pause button to see how the impact of past tightening is weighing on activity. As per CME Fedwatch tool markets are pricing in a 60% chance of the Fed hitting a pause button in its June meeting. Market participants are still worrying about the health of regional banks who are the major lenders to businesses and families. If the problems in the regional bank spread than it will spill over to the broader economy.
We expect the Rupee to face a hurdle near 83.00 level again in this week and slip back to 82.45 level amid softening crude oil prices and expectation of correction in dollar. Furthermore, market participants will keep a close eye on GDP data from the country. The Indian economy is expected to have grown by 5.1% during Q4 and for the entire financial year by 7% despite global headwinds.
In the past couple of months, US$INR has failed to breach 83.00 levels, which is acting as a strong hurdle. We expect the USDINR pair to appreciate back towards 82.45 levels in this week as long as it sustains below immediate resistance level of 82.85. A break below 82.45 levels may push the pair further downside till 82.30 levels. Only a close above 83.00 levels may reverse the trend and open the door for 83.30/83.50 levels. For Monday, Rupee future maturing on June 27th may appreciate further till 82.60 levels as long as it sustains below 82.90 levels
(Raj Deepak Singh, Analyst – F&O, Currency, and Commodities, ICICIdirect. Views expressed are author’s own. Please consult your financial advisor before investing.)