News Analysis

Rupee remains stable after the Fed keeps rate unchanged

Gurumurthy K BL Research Bureau | Updated on January 27, 2018 Published on May 04, 2017

But volatility is guaranteed in the coming days as the doors are open for a hike in June

The US Federal Reserve had on Wednesday kept the Fed Funds rate unchanged at 0.75-1 per cent. This move was widely anticipated by the market after the US posted a slower growth in the first quarter of this calendar year.

The US economy grew at an annualised rate of 0.7 per cent in the first quarter of 2017, its slowest in the last three years. But this slow growth has not changed the stance of the Fed on its future rate hikes as the Central Bank sees the labour market strengthening despite slower growth.

It is also evident from its statement that two more rate hikes are on the cards for this year. With five more meetings pending in this calendar year, there is already widespread expectation about a rate hike in the June meeting.

Watch the job numbers

The currency market has been stable after the Fed left the rates unchanged and retained its stance. However, short-term volatility is guaranteed in the coming days as the market approaches the next Fed meeting in June.

The US non-farm payroll numbers and the unemployment rate data release this Friday (May 5) will be the first event to watch which may give a cue about the probability of a rate hike in June. A strong job number will increase the speculation in the market about a June rate hike and may turn the dollar stronger.

The dollar index is currently hovering around 99 in a sideways range between 98.70 and 99.40. It is currently trading near 99.20. The key support in the 98.70-98.50 zone is holding as of now.

If the dollar index manages to post a strong close above 99 this week, it can rise to 100 and 100.70 levels in the short-term. The index will come under pressure only if it breaks below 98.70. Such a break can drag it to 97.50 or even lower levels.

What next for rupee?

The strong rally in the rupee after it broke the key level of 66 in March has failed to surpass the psychological 64 level decisively. The currency has lost momentum after recording a 20-month high of 63.93 last month. It has reversed lower from this high and is currently at 64.22.

There is a strong likelihood of the currency weakening to 64.5 or even 64.7 in the short-term. A strong break above 64.7 will increase the likelihood of the rupee weakening to 65.5 and 65.8 levels thereafter.

The currency will gain momentum only if it records a decisive daily close above 64. Such a break can take it higher to 63.85. If the rupee manages to breach 63.85, it can strengthen further to 63.60. However, the region between 63.85 and 63.60 is a strong resistance zone for the rupee and the currency strengthening beyond 63.60 looks unlikely at the moment.



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