The much-awaited “taper” has finally begun. The US Federal Reserve will reduce its asset purchase by $10 billion to $75 billion a month, starting January. But currency markets hardly reacted to the news. The rupee fell to 62.48 immediately after the Federal Reserve announcement, but reversed to close higher at 61.79 on Tuesday. Strong inflows from foreign institutional investors (FIIs) are also supporting the rupee. FIIs, which were on a selling spree since June in the debt segment, have now turned net buyers in December. Data available until December 23 show that the FIIs bought $371.2 million in debt and $1 billion in equity in the past week.

DOLLAR-INDEX The outcome of the US Federal Reserve meeting triggered a sharp rise in the dollar index from its crucial support of 79.7 last week. With immediate support at 80.25, the near-term outlook is bullish. It can test 81 in the days ahead. A strong break above 81 will be bullish and the index can then target 82.5. Conversely, inability to breach 81 will keep the index in the 79.7-81 range in the coming week.

DOLLAR-RUPEE OUTLOOK The rupee’s movement in the coming week could be muted as we step into the year-end holiday season. The rupee can stay below its key hurdle of 61 and can trade between 61 and 62.5. However, last week’s reversal from 62.48 looks significant. It is giving an initial signal of the confirmation of the ‘head and shoulder’ reversal pattern on the daily chart, whose neckline is near 62.6. Also, this increases the probability of the currency breaching 61.

The bias for the short-term is positive as long as the rupee remains above 62.6. The target on a breach of 61 will be 59.5. On the other hand, if the rupee declines below 62.6, a fall to 64 would be possible. For the medium term, 59 is a key resistance which might not be breached immediately. A reversal from here can see the rupee declining lower again in the medium term.

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