The U.S. Fed hiked the interest rates by 25 bps in February, as they felt it was appropriate to tackle high inflation. However, recent U.S CPI this week reflected that the inflation was still high despite retail sales numbers eased, suggesting that the U.S. Fed will raise the interest rate further.
Additionally, U.S. labour market remains tight after the recent spectacular non-farm data in the US rekindled market concerns over Fed interest rate hikes. The non-farm sector added a surprising 517,000 jobs in January and 311,000 in February. In fact, briefly, there were suggestions that the Fed could do a 50-bps hike in March. However, that changed after the recent banking sector crisis.
Many traders and other market participants speculated that the recent financial market crisis could also prompt the Fed to keep status quo on rates. The banking sector crisis started in the U.S. and spilled over to Europe as well.
So, we expect the Fed to ease up on their hawkish rhetoric. They could hike by 25-bps in March and could change their stance to neutral and say that further rates could be data dependent.
According to CME FedWatch tool, 63.5% of the market participants are currently saying that the Fed could hike by 25-bps and 36.5% of the market participants are currently saying that the Fed remain status quo on rates.
Status quo would pull the Dollar Index lower, although current fears of a recession could prompt investors to hold onto dollar due to its safe haven appeal during crisis times. The market has already factored in 25 bps rate hike but the Fed will also release dot chart and projections in the upcoming meeting.
A hawkish guidance may push the dollar higher and weaken other asset classes and the rupee may fall further. Technically, the USDINR pair has experienced a stiff resistance around 83.10 / 83.20 levels for last couple of months.
However, considering the strong undertone in the dollar index, the USDINR pair may appreciate in the sessions to come. Nonetheless, the RBI will review monetary policy on April 3, 2023, hence the pair is likely to stay volatile going ahead with a positive undertone. For the dollar index, 106 is a cap which in case bulls manage to break, further rally is expected till 107.50. The outlook is bullish for the USDINR for the rest of the month.
Source: Reliance Securities