The dollar index is expected to to face the hurdle near 105.50 and slip back towards 103.70 amid decline in US treasury yields and increasing probability of US Fed pause in the next policy meeting.
Rupee depreciated to its lowest level in two weeks on the back of strong dollar and outflow of funds from the domestic markets. The improved economic numbers from the US have pushed the dollar index to its highest level since March 2023 at 105. Further, rise in crude oil prices, which moved to its highest level in 8-months, also weakened the domestic currency.
We expected the dollar index to face the hurdle near 105.50 and slip back towards 103.70 amid decline in US treasury yields and increasing probability of Fed pause in the next policy meeting. The expected decline in US retail sales and Industrial production numbers could force the Fed to remain less hawkish than anticipated. Meanwhile, expectation of a drop in Core US CPI numbers could support the Fed to keep the rate hike aside. The CME Fed Watch toll indicates that the rates will remain unchanged with a higher probability of 92% in the September meeting. However, the probability of 25 bps rate hike in the November meeting has increased to 50% from 36%.
Going forward investors will remain cautious ahead of next week’s ECB policy outcome, where the central bank is expected to increase the rates by 25 bps amid higher inflation numbers. On the other hand, the PBOC is expected to cut the one-year MLF rate by 10 bps to support the housing sector. On the domestic front, investors will keep an eye on inflation and industrial production numbers. The expectation of higher inflation numbers could push the RBI to tighten the liquidity conditions.
USDINR is expected to face the hurdle near 83.30 and weaken towards 82.70 amid softness in US dollar and treasury yields. A move below 82.70 would weaken the pair further towards 82.45. On the contrary a move above 83.30 would push the pair towards 83.50.
