Money & Banking

Strong dollar caps upside in rupee

Gurumurthy K | Updated on August 07, 2018 Published on August 06, 2018

The Indian currency continues to consolidate sideways but with a bearish bias

 

It was another week of indecisiveness for the Indian rupee. The currency has been stuck in a range between 68.25 and 69.10 over the past five consecutive weeks. Within this range, the rupee rose to a high of 68.26 on Thursday, after the Reserve Bank of India increased the repo rate by 25 basis points to 6.5 per cent. However, the currency failed to sustain higher and reversed sharply lower, giving back all the gains made during the week. The US dollar index gaining momentum in the past week dragged the rupee from the week’s high of 68.26 to close at 68.89 on Monday, down 0.3 per cent for the week.

Dollar strengthens

Strength in the US dollar capped the upside in the rupee last week. The US dollar index reversed sharply higher in the past week from its low of 94.15, and is currently trading at 95.28. The index is likely to test the key 95.55-95.60 resistance region in the near term. There is a strong likelihood of the index breaching 95.60 in the coming days, as the euro (a major component of the dollar index) is looking weak. The euro (1.1560) looks vulnerable for a fall to 1.1450 or even 1.14 in the near term, which may aid the dollar index to breach 95.60. The dollar index can target 96.50 on a break above 95.60. Such a rally in the dollar index would increase the pressure on the rupee.

The trade war between the US and China seems to be intensifying. Last week, US President Donald Trump had ordered to revise higher the tariffs on $200-billion worth of Chinese goods from 10 per cent to 25 per cent. China, in retaliation, had announced that it has plans to impose tariffs between 5 and 25 per cent on $60-billion worth of US goods. The ongoing tariff war is likely to keep emerging market currencies, such as the rupee under pressure.

Rupee outlook

The bounce from 68.26 last week keeps the broader 68.25-69.10 sideways range intact for the rupee. The bias continues to remain negative. The indicators on the chart are also giving negative signals. The 55-week moving average has crossed below the 200-week moving average. It is on the verge of crossing below the 100-week moving average as well. This is a negative signal, indicating that the upside could be limited for the rupee.

This leaves the possibility high for the rupee to break the current sideways range below 69.10.

Such a break can see the rupee declining towards 69.5 and 70 over the short term. This move could be swift as the currency has been consolidating for a prolonged period of time. Such a fall to 70 will also keep the medium-term bearish outlook intact for the rupee, which can weaken to 71 and 72 levels in the coming months.

Published on August 06, 2018
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