Set-up for USDINR remains bearish, fears of further rate hikes spook traders; Fed Chair Powell’s speech eyed

Set-up for USDINR remains bearish, fears of further rate hikes spook traders; Fed Chair Powell’s speech eyed

By Dilip Parmar

Markets have moved to price-in-tightening liquidity conditions and higher for longer US rates. The Indian rupee caps a fourth week of losses in four amid broader dollar strength and risk-averse sentiments after US bond yields surged to a multi-year high. It has been a few paise away from a previous record low of 83.29 touched in October. India’s key stock gauges registered their longest streak of weekly loss since May 2022.

India’s forex reserves snapped a three-week losing streak, up by $700 million to $602.16 billion as of August 11, data from the Reserve Bank of India (RBI) showed on Friday. Foreign currency assets (FCAs) increased by $999 million to $534.40 billion amid a revaluation of dollar assets.

Outlook

Technical set-up for spot USDINR remains bearish following the daily chart’s formation of lower tops and bottoms. The pair has strong support around 81.50 and resistance around 82.50.

The state of China’s economy and concerns over U.S. interest rates are likely to continue to worry market participants, pushing the dollar index higher. The ICE dollar index registered a fifth weekly gain to 103.37 as markets braced for higher rates after FOMC meeting minutes. Most US economic data released this week surprised to the upside with retail sales growing by 0.7% and headline industrial production rising 1% in July, beating the consensus estimate.

The report reflects a marginal increase in broader dollar bearishness with the aggregate dollar short position held by speculators increasing by $490 million to $16.7 billion. Leveraged/hedge fund boosted the moderate dollar short activity by $6.1bn to just under $11 billion, the biggest bet against the dollar since early 2021.

What to Watch

The economic calendar for this week includes Fed Chair Powell’s Jackson Hole Presentation, loan prime rate adjustments by China’s bank, euro-area PMI data, Tokyo CPI and central bank decisions from Indonesia, South Korea and Turkey. Fed Chair Powell’s speech may emphasize the need to keep rates higher for longer in order to curtail inflation.

(By Dilip Parmar, Research Analyst, HDFC Securities. The views expressed are the author’s own. Please consult your financial advisor before investing.)