By Raj Deepak Singh
Rupee depreciated last week amid a bounce in the dollar and weak global market sentiments. Market sentiments were hurt on concern over the health of regional banks in the US, economic slowdown in China and uncertainty over US debt ceiling. The US Dollar gained this week despite the ease in inflation numbers and jump in jobless claims. USDINR after making a low of 81.70 moved north towards 82.20.
We expect the Dollar index to face hurdles near 102.50 levels and correct back till 101.40 levels in hopes that the US Federal Reserve will hit a pause button next month. Reasons behind this would be growing fears of recession and deepening worries about the health of regional banks. On top of it, inflation edged further lower in April and slowed below 5% for the first time in 2 years. Recent reports of CPI showed price pressures are not worsening and might soon be slowing. Additionally, measures of producer prices notched its slowest rate of growth signaling that inflation is slowing. Further, workers filing for jobless claims rose by 22,000, highest level since October 2021.
These data points are suggesting a slowing economy which may provide room for the Fed to pause their aggressive tightening campaign sooner. As per CME Fedwatch tool markets are pricing almost 90% chance of the US Federal Reserve hitting a pause button in its June meeting but have started to price in deep cuts in interest rates by the end of the year. Moreover, investors are worried that if the problems in the regional bank spread then it will spill over to the broader economy as they are the major lenders to businesses and families.
Going forward investors will remain cautious ahead of major economic data from the US, UK and Europe to gauge the economic health of the countries. US Industrial production data is likely to show that activity in the sector is slowing while housing data is projected to show weakness in the sector. Forecast for upcoming economic data from the US seems to signal that the economy has started to slow amid high borrowing cost. Investors will even remain vigilant ahead of the debt ceiling meeting between US President Joe Biden, House Speaker Kevin McCarthy and other congressional leaders.
We expect the Rupee to appreciate back again amid softening crude oil prices and expectation of weakness in the dollar. Softening of crude oil prices may be supportive for the domestic currency as it will reduce import bills. In the past couple of weeks, US$INR has failed to breach 82.50 levels, which is now acting as a strong hurdle. We expect the USDINR pair to appreciate back towards 81.70 levels in this week as long as it sustains below 82.30 level. A break below 81.70 levels may push the pair further downside till 81.50/81.30 levels. Only a close above 82.30 levels may reverse the trend and open the door for 82.50/82.80 levels
For Monday, Rupee Futures maturing on May 29th may appreciate further till 82.00 levels as long as it sustains below 82.30 levels.
(Raj Deepak Singh, Analyst – Currency, Commodity, & Derivatives, ICICIdirect. Views expressed are author’s own. Please consult your financial advisor before investing.)