The rupee (INR) edged higher against the dollar (USD) on Monday. After opening higher at 70.79 against its previous close of 70.94, the Indian currency closed at 70.85 yesterday. It managed to trade above the key support at 71. 

On a broader view, the exchange rate has been trading in the 70.5 and 72.25 range since September last year. Thus, if the rupee advances from the current levels, it will face a significant hurdle at 70.5. On the other hand, if the domestic currency weakens, 71.2 will act as a support below 71.

Inflation

Government data released on Monday showed that the Consumer Price Index (CPI) has shot up substantially. For December 2019, CPI stood at 7.35 per cent, compared to 2.11 per cent in the same month of the previous year. Sequentially, too, it has shot up from the 5.54 per cent registered in November 2019.

Food and beverages, the largest component of CPI (54.2 per cent weight) increased by a significant 12.16 per cent. This was led by vegetables, which increased by 60 per cent. The current level of inflation is well above the RBI target of 4 per cent, and if it stays higher for a considerable period, will weigh on the Indian currency.

Dollar index

The dollar index, which has struggled to move past 97.5, lies in the 50-day moving average at 97.6. Thus, the price band between 97.5 and 97.6 might act as a strong resistance. If the index moderates on the back of this, the immediate supports are at 97.2 (21-day moving average) and 97. Hence, the index can be expected to oscillate between 97 and 97.6 for quite some time.

Trade strategy

Higher than expected inflation can act as a dampener even though the prevailing trend is bullish. Hence, traders are recommended to sell rupee on rallies with tight stop-loss.

 

Supports: 71 and 71.2

Resistances: 70.75 and 70.5

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