Money & Banking

Pressure mounts on rupee...

BL Research Bureau | Updated on June 18, 2018

... as dollar strengthens on the back of weak euro

The Indian rupee fell sharply in the past week to test 68 levels again. It fell breaking below 68 to make a low of 68.21 on Monday. However, it managed to recover from this low and closed at 67.98, down 0.82 per cent for the week.

The ECB trigger

Surprisingly, the rupee remained relatively stable after the US Federal Reserve meet last week on Wednesday. The Fed increased the interest rates by 25 basis points as expected and indicated that there will be a total of four rate hikes this year. This means two rate hikes are on the cards from the Fed for this year. Earlier, the Fed had plans to increase rates only thrice this year.

The trigger for the rupee’s fall came the next day from the European Central Bank (ECB), which also kept rates unchanged as expected. However, the ECB announced that it would end its bond purchase programme by December this year. ECB announced that it would continue its bond purchase at the current pace of €30 billion a month until September. It will then purchase €15 billion a month in the last quarter of this year and end it by December. The market had expected the central bank to stop the bond purchase by September.

Strong dollar

The outcome of the ECB meet saw the euro tumbling against the US dollar by 3 per cent from 1.185 to 1.155. This took the US dollar index higher from around 93.5 to 95.

As a result, the rupee opened with a wide gap-down on Friday and fell to revisit 68 levels. The dollar index has come off slightly on Monday after testing its crucial resistance at 95.15. Inability to breach this hurdle can drag it to 94 or 93.5 again. This may give some relief to the rupee and limit the downside.

But if the dollar index breaks above 95.15 decisively, it can gain momentum and move up to 96.5 in the short term. Such a rally in the dollar index can keep the rupee under pressure. The gap-down open on Friday last week is a negative for the rupee. The region between 67.80 and 67.70 is a good near-term resistance for the rupee.

Only a strong break below this resistance region will turn the near-term outlook positive for the currency. The next targets are 67.5 and 67.3. But such an upmove is possible only if the dollar index remains below 95.15 and falls to 94 or 93.5.

But as long as the rupee remains below 67.70, the outlook will remain negative. A fall to 68.5 is possible in such a scenario. A break below 68.5 will see the rupee testing the previous lows of 68.86 in the coming days.

Published on June 18, 2018

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