Money & Banking

Rupee retains its strength

Gurumurthy K BL Research Bureau | Updated on January 09, 2018

The rupee, as expected, continued to strengthen against the US dollar in the past week. The currency stayed strong all through the week and rose to a high of 64.01 on Friday on the back of the exit poll results that indicated a strong victory for the Bharatiya Janata Party (BJP).

Although the rupee tumbled sharply to an intra-day low of 64.72 in opening trades on Monday after the initial rounds of the Gujarat Assembly election results, the currency immediately managed to recoup the losses. It closed at 64.23 on Monday, up 0.21 per cent for the week.

The outcome of the US Federal Reserve meeting in the past week also supported the rupee. The Fed, as widely expected, increased interest rates by 25 basis points, which didn’t surprise the markets.

The central bank had revised upwards the US growth outlook, but it did not make any changes to the future rate hikes plan. The Fed expects the US to grow at 2.5 per cent this year, up from 2.4 per cent projected earlier.

For 2018, the growth forecast has been raised to 2.5 per cent from the earlier forecast of 2.1 per cent. On the interest rate front, the Fed left the median projection of the policy rate unchanged at 2.1 per cent for 2018 leaving room for three rate hikes next year.

The US dollar witnessed a sell-off after the Fed meeting. The dollar index fell sharply from 94.20 to a low of 93.28 on Thursday. The bounce-back from this low failed to breach 94 thereafter and the index has come off again after hovering at 94 on Friday. It is currently trading at 93.73. The immediate outlook is not clear.

The dollar index has to decisively break above 94.20 in order to gain fresh momentum. Such a break can take the index higher to 95. Further break above 95 will then pave the way for the next target of 96.

On the other hand, as long as the index trades below 94, it can fall to test 93.3 once again. A strong break below 93.3 will increase the likelihood of the index falling to 92.85 or even lower.

The rupee is hovering below the key psychological resistance level of 64. Inability to break above this hurdle can see the rupee losing some steam in the near term, and weaken to 64.45 or even to 64.60 in the coming days. In such a scenario, a range-bound move in the band between 64 and 64.5 can be seen in the short term. The price action on Monday suggests that the rupee is more likely to sustain below 64 in the near term.

That said, if the rupee manages to decisively breach the 64-mark, then it can extend its current upmove to 63.83. A strong break above 63.83 will increase the likelihood of the currency rallying to 63.60 thereafter. The 63.83 and 63.60 levels are crucial medium-term resistances.

Whether the rupee manages to break these hurdles or not will decide the next move over the medium term.

Published on December 18, 2017

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