Indian Rupee support at 78.80-78.50 against US Dollar; ECB, BoJ monetary policies to guide currency movement

This week will be crucial for forex markets as two major central banks, ECB and BoJ release monetary policy and due to that front end volatility could remain on the higher side.

Indian Rupee support at 78.80-78.50 against US Dollar; ECB, BoJ monetary policies to guide currency movement
The dollar has appreciated against all major global currencies, reaching its multi-year highs against the euro, pound, yen and many other EM currencies

By Dilip Parmar

The Indian rupee managed to recover on Friday but settled with the eleventh weekly loss for the first time after 2008. The Indian currency has depreciated almost 7% against the dollar in 2022 but might not weaken further over the next few months as the market is already priced in weaker economic data and foreign fund outflows. 

The central bank’s efforts have supported the rupee from sharp depreciation and remain the median performer among Asian currencies. If we look at the recent forex reserves data, it fell by more than $8 billion to $580.06 billions on the back of intervention and adjustments of other than dollar currencies value. Another data from RBI monthly publication indicated it aggressively intervened in May through forwards, leading to a total drawdown of almost $14.63 billion from its forwards’ book. The reason being we have seen forward premiums declined in the last two months. 

In the week gone, spot USDINR gained 62 paise or 0.8% to 79.88, registering the biggest weekly gains since March 2022. After witnessing a parabolic up move in the last couple of months there could be some consolidation on the cards, in the coming days. The pair is having near-term resistance at 80 followed by 80.90 while on the downside it has support in the area of 78.80 to 78.50.

The dollar has appreciated against all major global currencies, reaching its multi-year highs against the euro, pound, yen and many other EM currencies. It is expected to appreciate further amid the central bank’s firm hawkish stance and risks of a global recession. However, in the short-term change in risk moods and the flows, the dollar could retrace in the coming weeks.

This week will be crucial for forex markets as two major central banks, ECB and BoJ release monetary policy and due to that front end volatility could remain on the higher side. The European Central Bank and Bank of Japan are both expected to stick with negative interest rates at meetings this week, contrasting with forecasts for the Fed to hike by 75 bps later in July.  Looking at the recent EU economic data and Fed’s rate projection for July, ECB may need to consider a 50 bps hike and if it delivers Euro could witness a short covering rally. 

(Dilip Parmar, Research Analyst, HDFC Securities. Views expressed are the author’s own.)

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