Key Takeaways
- The Indian rupee is expected to open little changed on Wednesday.
- Softer U.S. inflation data has reduced expectations of a Federal Reserve rate hike.
- Crude oil prices continue to rise, putting pressure on the rupee.
The Indian rupee is anticipated to remain stable at the start of the week, with traders expecting it to open in the range of 96.18-96.22 per dollar, following a settlement of 96.20 on Tuesday. This stability comes amidst cooling expectations for a Federal Reserve rate hike due to softer-than-expected U.S. inflation data.
According to traders, the Indian rupee has faced significant pressure recently, particularly from renewed US-Iran hostilities that have driven up oil prices. Brent crude was trading near $86 per barrel in Asia on Tuesday, significantly higher than its level of around $70 just two weeks ago. This upward trend in oil prices continues to pose a challenge for the rupee.
Despite dollar sales by the central bank in both spot and non-deliverable forward markets, the rupee weakened past the 96-per-dollar mark on Tuesday, highlighting its vulnerability. A currency trader at a bank noted that while higher oil prices are part of the story, there appears to be more factors weighing on the rupee than just crude.
The relief for the Indian rupee came from softer-than-expected U.S. inflation data in June, which prompted markets to reduce their expectations of near-term Federal Reserve rate hikes. The probability of a 25-basis-point Fed rate increase at the July meeting fell to 16.6% from 41.7% a day before, according to CME Group’s FedWatch tool.
For September, market pricing for a hike dropped to 59.8%, down from 75.1% on Monday. Recent escalation in Middle Eastern conflicts and the resulting rise in oil prices had previously strengthened expectations of Fed hikes. However, June inflation data moderated these concerns, providing support for risk assets and Asian currencies.
Citi Research noted that surprisingly cool June inflation, slowing core Personal Consumption Expenditures, and softer jobs data rule out a July rate hike. The research firm expects similar data in coming months will lead markets to price-out the chance of rate hikes altogether.
