It was a volatile week for the rupee last week. After making some initial gains during the week, the rupee reversed lower sharply to a low of 64.74 as the US dollar strengthened after the Federal Reserve raised rates by 25 basis points.

However, the nervousness was short-lived as the rupee managed to recover from the low to close at 64.43 on Monday.

Fed rate hike

The US Federal Reserve last week increased the interest rate by 25 basis points as expected. It also announced its plan to unwind its balance sheet beginning this year.

Though the Fed acknowledged that inflation could remain low for some time, there was no change in its stance on the policy front.

One more rate hike is due this year and the Fed has made it clear that the market will be well informed about its balance sheet trimming.

The dollar index (97.15) fell to a low of 96.3 initially after the Fed outcome, but managed to reverse higher from there to a high of 97.55 on Thursday. Though it has come off from this high, there is a key support at 96.90.

If the index manages to sustain above 96.90, there is a possibility of seeing a rise to 98 in the coming days.

A strong break above 98 can take it further higher to 98.30 and 98.50.

On the other hand, if the dollar index declines below 96.90, it can fall to 96.45. A break below 96.45 will bring renewed pressure on the index and can drag it to 96 or even 95 thereafter. The dollar index may remain volatile as Brexit talks begin this week.

FPI flows support

Foreign portfolio investors (FPIs) continuing to pour money into the debt segment is providing strong support for the rupee. FPIs had bought $3 billion in debt so far this month.

The debt segment has witnessed an inflow of $9.2 billion so far this quarter (April-June) and is likely to touch $10 billion in this quarter if the current trend continues.

Strong foreign money flow has been one of the major factors that has turned the rupee stronger this year.

Continuing flows may aid in limiting the downside in the rupee.

Inability to sustain the break below 64.5 is a positive.

This level will continue to act as a near-term support for the currency. As long as it trades above 64.5, the rupee can strengthen to 64.20 or even 64.2 in the coming days.

The currency will come under pressure only if it falls below 64.50 decisively. Such a fall can take it lower to 64.75 or even 65 thereafter.

Broadly, the rupee has been stuck between 64 and 65 for a prolonged period. A break on either side of 64 or 65 will determine the next move of the currency.

If the rupee breaks above 64, it can strengthen to 63.85 and 63.60. On the other hand, if it breaks below 65, it can fall to 65.5 and 66.

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