Key points:
The Indian rupee looks likely to gain momentum after media reports, including those from the Financial Times and Wall Street Journal, indicated that next week’s Federal Reserve decision might involve a larger-than-expected rate cut.
The 1-month non-deliverable forward market is projecting the rupee to open at 83.92-83.94 against the U.S. dollar, an improvement from Thursday’s level of 83.9650.
The shift in sentiment comes as traders had initially priced out the likelihood of a significant rate cut following U.S. employment and inflation reports for August. However, market probabilities for a 50-basis-point cut have surged to 40%, up from just 14% the day prior.
This change in expectations occurred despite the August U.S. producer price index showing a slightly higher reading than anticipated, and jobless claims data aligning with forecasts.
The dollar index (DXY) dropped to around 101, approaching its year-to-date low, further weakening the greenback’s position.
Market sentiment has slightly tilted back toward a 50-bps rate cut, putting the dollar under pressure. However, the bank expects the Federal Reserve to stick with a more modest 25-basis-point reduction, citing stable financial and economic conditions that don’t justify a more aggressive rate-cutting cycle.
Previously: Rupee hovering at weak levels as dollar struggles before key U.S. jobs data
In India, the rupee remains well-supported at the 84 level, thanks largely to consistent intervention by the Reserve Bank of India (RBI). The central bank has successfully prevented the rupee from slipping past 84 for over a month, keeping it stable in the face of global currency volatility.
Picture: Upside prevails for Indian rupee. Download the VT Markets app now.
If the Federal Reserve opts for a 50-bps cut, the rupee could strengthen further, potentially dipping below 83.90 against the dollar. However, if the Fed follows through with a 25-bps cut, the rupee may still gain but within a narrower range, stabilising around the 83.90-84.00 level.
The Reserve Bank of India is likely to maintain its active intervention strategy to prevent sharp movements in the currency, keeping the rupee well-supported in the near term.
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