Rupee likely to lose momentum

Downward reversal from a key resistance, coupled with a strong dollar, weakens the outlook for the currency





The resistance at 64.45 has held well and the rupee has reversed lower as expected. The currency which began the week on a strong note, appreciated to 64.48 against the dollar by Thursday. However, it failed to sustain at higher levels, giving back most of the gains notched up during the week. The rupee fell to a low of 64.74 on Monday before closing at 64.68.

BoE joins the race

The Bank of England (BoE) has joined the race with other central banks like the US Federal Reserve in beginning its rate hike cycle. The BoE meeting was in focus last week and, as expected, it increased the interest rate after almost a decade by 25 basis points. But lack of convincing signs on future rate hikes knocked down the British pound by about 2 per cent from around 1.33 to a low of 1.3030 against the US dollar last week. On the other hand, the US Federal Reserve meeting became more like a non-event as it left the interest rates unchanged as expected. This confirms a definite rate hike in December. On the data front, US non-farm payroll failed to meet the expectation. The payrolls increased by 261,000, less than the market’s expectation of an increase of 31,000. However, the higher revisions in the previous two months (August, September) payroll numbers restricted the downside in the dollar index, which fell initially on the back of the weak headline numbers.

Bullish dollar

The dollar index (94.86) is hovering around a key resistance level of 95. A strong break and a decisive close above this hurdle can boost the momentum. Such a break can take the index higher to 95.5 initially. Further break above 95.5 will pave the way for the next targets of 96.3 and 96.5.

Key support is at 94.4 is limiting the downside well over the last one week. The near-term view will turn negative if the dollar index breaks below this support. The next targets are 94 and 93.85. The region around 93.85 is a strong support and a break below it is unlikely. The possibility is high of the index sustaining above 93.85 and break above 95, eventually to target 96 and 96.5 in the coming weeks. As such, the strength in the rupee could be limited and a fall to revisit 66 or even lower is more likely.

Rupee outlook

The downward reversal last week from 64.48 is technically significant as it has happened from a key trend-line as well as a Fibonacci retracement resistance level of 64.45. This pull-back move also signals that the corrective rally that has been in place since the October low of 65.89 could have ended.

There is a strong likelihood of the rupee falling to 64.90 in the near term. A break below 64.90 can take it further lower to 65.10 and 65.20 in the short term. A decisive weekly close below 65.2 will then pave the way for a revisit of 66 levels thereafter.

Rupee will gain momentum only if it breaches the key hurdle of 64.45. Such a break, though less likely, can see the currency strengthening to 64.3 or even 64 thereafter.

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