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The Indian rupee strengthened in the initial part of last week, breaking above the resistance level of 70.85. But the currency failed to sustain higher as the momentum was short-lived. The rupee reversed sharply lower after making a high of 70.40 on Tuesday, giving back all the gains.
The currency declined below 71 again and closed at 71.36 on Monday, down 0.26 per cent for the week.
A strong rise in oil prices caused the sharp downward reversal in the rupee last week.
Brent crude prices surged over 6 per cent in the past week, breaking above the key resistance level of $64. It is currently trading at $66.1 per barrel.
The region between $64 and $63 will now act as a strong support. As long as Brent crude trades above $63, a further rise to $68 and $70 looks likely in the short term. As such, the rupee is likely to remain under pressure and fall further in the coming days. The ongoing trade deal talk between the US and China is another important event that will need a close watch.
Both countries are in the process of trying to strike a trade deal before the March 1 deadline for the US to impose additional tariffs on Chinese imports kicks in.
The US President had proposed a 60-day extension beyond the March 1 deadline. If both countries fail to strike a deal, it will turn the market more risk-averse and trigger a sharp sell-off in risky assets such as equities and make the dollar strong.
In such a scenario, a strong dollar can add more pressure on the rupee, along with the rise in oil prices.
Rupee outlook
The near-term outlook is negative for the rupee. A dip to test the immediate resistance levels of 71.60 and 71.70 is likely in the near term. A break above it can take the rupee to 72.
A strong break below 72 will increase the downside pressure. It will then increase the possibility of the rupee weakening towards 72.5 and 73 in the coming weeks.
The level of 71 is a key resistance. The rupee has to breach this hurdle to get a breather. Such a break will then increase the likelihood of the currency strengthening towards 70.5 and 70.4 to the dollar again.
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