News Analysis

Rupee gains on weak dollar

Gurumurthy K | Updated on January 09, 2018 Published on July 31, 2017

But crucial resistances ahead could limit the strengthening of the currency

The rupee, which was hovering around 64.40 in the initial part of the week, gained momentum on the outcome of the US Federal Reserve meeting and opened with a wide gap-up on Thursday.

It touched a high of 64.05 on Monday but lost some of the gains and closed at 64.18.

The coming week is filled with a couple of key events which can make the markets volatile. The Reserve Bank of India’s monetary policy meeting is on Wednesday.

A 25-basis point rate cut is widely expected by the market on the back of low inflation. This will be followed by the US unemployment rate and the non-farm payroll numbers on Friday.

Dollar tumbles

The US Fed kept rates unchanged in its meeting last week and had raised concerns on inflation remaining low. It had also mentioned that the balance sheet unwinding will begin relatively soon.

The Fed’s concern on inflation lowered the probability of aggressive rate hikes. As a result, the dollar index fell from around 94 to a low of 93.15 on Thursday. It is currently trading at 93.45. The political uncertainty prevailing in the US is also piling pressure on the dollar.

Short-term outlook for the dollar index remains negative. Key resistance for the index is in the 94-94.25 zone, which can cap the upside. A break below 93 can drag the dollar index lower to 92.25 in the coming days.

Such a fall in the dollar index may help the rupee retain its strength in the coming days. However, strong support in the 92.25-92 region and an upward reversal from there targeting 94 cannot be ruled out.

Rupee outlook

The rupee faces crucial resistances at 63.95 and 63.80. Currently, it is hovering above the first resistance level of 63.95. If it manages to break above 63.95, it can move up to 63.80.

Further strengthening of the currency is possible only if it manages to surpass 63.80 decisively. Such a break can take the rupee higher to 63.60 in the short term.

But if the rupee fails to break above 63.95 in the coming days or it reverses lower after testing 63.80, it can fall to 64.15 or 64.20. The level of 64.20 is a key near-term support for the currency.

A strong break below 64.20 will increase the possibility of the currency falling to 64.45 and 64.50. It will also increase the likelihood of the rupee revisiting 65 levels once again thereafter.

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