Rupee eyeing 80 levels led by dollar weakness

View on US$INR and Rationale

Rupee is likely to appreciate further in the month as dollar is losing its steam. Further, rupee may gain strength on optimistic global market sentiments and FII inflows. Additionally, softening of Crude oil prices may be supportive for the domestic currency as it will reduce the Import bills. Oil prices are declining on worries that rising Covid-19 cases in China may hamper economic activity and eventually dent fuel demand. Furthermore, Investors will remain cautious ahead of RBI monetary policy, where central may slow down the pace of rate hike. Rate hike expected to be in the range of 25-35bps

View on EURINR and Rationale

EURINR may rise further till 86.50

Euro is likely to trade with a positive bias amid weakness in US dollar and optimistic global market sentiments. However, market will remain cautious ahead of ECB monetary policy meeting where central bank may raise its interest rates to combat soaring inflation at the cost of economic growth. Markets are swaying back and forth about whether the ECB will raise its policy rates by 50 or 75bps. EURUSD is likely to surpass 1.0500 level to continue its upward trend and as long as it sustains above the 100 DMA level of 1.0040, then it will rise towards the level of 1.0730. EURINR is expected to rise further till 86.50 level

View on GBPINR and Rationale

GBPINR likely to rally towards 100.0

The pound is expected to trade with a positive bias amid weakness in dollar and rise in risk appetite in global markets. However, market will remain vigilant ahead of Bank of England monetary policy where, central bank is likely to raise its interest rates by 50bps. Additionally, sharp upside may be capped on concern that rising borrowing cost may hurt households who are already grappling with cost of living crisis. BOE rate hike’s to control inflation even into recession will do more harm to currency rather than boosting currency value. GBPUSD is likely to break key resistance level of 200 DMA at 1.2260 to continue its upward trend towards the level of 1.2500. GBPINR is expected to continue its upward trend towards 100 levels.

US dollar may slip further till 103 levels

• Dollar, in early part of the month, rallied to 113 levels after US Federal Reserve raised its benchmark interest rate by another 75bps, for 4th consecutive month and signaled that it would continue to lift rates this year to combat inflation. However, in the later part of the month the dollar slipped back towards 105 levels after FOMC meeting minutes showed that most of the officials are in view that central bank should slow the pace of interest rate increases. Policymakers were even worried over the risk of rapid policy tightening on economic growth and financial stability. Meeting minutes also revealed that some of the officials were more anxious about possibility of overdoing the increases
• Dollar is expected to continue with its downward trend towards the level of 103.00 in this month amid expectations that US Federal Reserves will be less aggressive with interest rate hikes in the coming meetings, as it takes time for the full effects of those increases to ripple through economy. CME Fed tool watch indicates 77% probability of 50 bps rate hike in December meeting. Investors will closely watch key economic data from the US like CPI and job data as it influence’s Fed policy decision

Rupee may appreciate further till 80.00 level

• Rupee appreciated last month, marking its first monthly gain this year amid weakness in dollar and rise in risk appetite in the domestic markets. Further, sharp decline in crude oil prices and FII inflows supported rupee. FII’s turned net buyers and during the month so far there has been inflow of INR 33,847 crores into Indian markets
• Moreover, better than expected macroeconomic data from India added support to the rupee. India's industrial production rose by 3.1 percent from a year earlier in September 2022. Additionally, global India services PMI was up by 55.1 in October 2022 from September's six-month low of 54.3, as employment rose for the fifth month in a row and at the second-fastest pace in over three years. However, sharp appreciation was prevented as India's inflation remained above RBI’s comfort zone and trade deficit has widened to $26.91 billion
• Rupee is likely to appreciate further in the month as dollar is losing its steam. Further, rupee may gain strength on optimistic global market sentiments and FII inflows. Market sentiments improved as pressure on other major central banks to keep raising interest rates cleared off after Fed signaled slowdown in pace of rate hike
• Additionally, softening of Crude oil prices may be supportive for the domestic currency as it will reduce the Import bills. Oil prices are declining on worries that rising Covid-19 cases in China may hamper economic activity and eventually dent fuel demand
• Furthermore, Investors will remain cautious ahead of RBI monetary policy, where central may slow down the pace of rate hike. Rate hike would be in the range of 25-35bps. Market participants will also focus on statements from central bank to get the hint on future monetary stance
• US$INR may slip further till 80.00 as long as it sustains below 82.30 levels

EURINR may rise further till 86.50 level

• Euro rallied last month and touched four months high mainly on the back of a weak US dollar and rise in risk appetite in global markets. Further, euro was supported as CPI data from euro zone showed inflation remained elevated, raising expectations that the European Central Bank will continue to increase rates to combat soaring inflation. Additionally, ECB President Lagarde said the bank must keep raising interest rates to fight off inflation, even if the probability of a euro zone recession has increased. Moreover, stronger-than-expected industrial production and German ZEW economic sentiment data from the Eurozone, supported single currency
• Euro is likely to trade with a positive bias amid weakness in US dollar and optimistic global market sentiments. However, market will remain cautious ahead of ECB monetary policy meeting where central bank may raise its interest rates to combat soaring inflation at the cost of economic growth. Markets are swaying back and forth about whether the ECB will raise its policy rates by 50 or 75bps. EURUSD is likely to surpass 1.0500 level to continue its upward trend and as long as it sustains above the 100 DMA level of 1.0040, then it will rise towards the level of 1.0730. EURINR is expected to rise further till 86.50 level

 GBPINR likely to rally towards 100.0 level

• The pound edged higher by more than 5% and touched level last seen in august amid weak US dollar index and as Bank of England raised its interest rates by 75 bps to combat soaring inflation. However, further upside was restricted as British Finance Minister Jeremy Hunt announced a budget with a string of tax increases and tighter public spending, saying the economy is already in a recession and set to contract next year
• The pound is expected to trade with a positive bias amid weakness in dollar and rise in risk appetite in global markets. Bank of England is likely to raise its interest rates by 50bps in the coming monetary policy. Additionally, sharp upside may be capped on concern that rising borrowing cost may hurt households who are already grappling with cost of living crisis. BOE rate hike’s to control inflation even into recession will do more harm to currency rather than boosting currency value. GBPUSD is likely to break key resistance level of 200 DMA at 1.2260 to continue its upward trend towards the level of 1.2500. GBPINR is expected to continue its upward trend towards 100 level

Major central bank monetary policy update

US Federal Reserve

US Federal Reserve decided to raise interest rate by 75 bps to a range of 3.75-4.00% and signaled intention to keep raising them. The central bank signaled that magnitude of the hikes may be smaller but may ultimately move to higher levels than anticipated.

Federal Open Market Committee decided to continue its balance sheet reduction as announced in May 2022. US Federal Reserve Chair Jerome Powell warned that reducing the size of rate increases in the coming future does not mean that Fed is anywhere close to pivoting away from raising rates. It is very premature to be thinking about pausing.

Furthermore, Fed cautioned that it may raise borrowing costs next year more than they have projected.

European Central Bank

The European Central Bank raised interest rates by 75 bps for a second time in a row to combat soaring inflation but showed concerns about economic growth.

ECB expects to raise interest rates further, to ensure the timely return of inflation to its 2% medium-term inflation target. Further, it added that future policy rate decisions will continue to be data-dependent and follow a meeting-by-meeting approach.

ECB decided to adjust the interest rates applicable to TLTRO III from November 23, 2022 and to offer banks additional voluntary early repayment dates.

Bank of England

The Bank of England raise interest rates by 75 bps to 3% during its November meeting, the largest rate hike since 1989. 7 members of the Monetary Policy Committee voted for a 75 bps hike at the bank's November meeting, while 2 backed a smaller rise.

Further, policymakers voiced concerns about stubbornly high inflation, which rose back to a 40-year high in September, amid weakening economic outlook. The central bank also said further increases in Bank Rate may be required for a sustainable return of inflation to target.

GDP is projected to continue to fall throughout 2023 and 2024 H1, as high energy prices and materially tighter financial conditions weigh on spending.

Reserve Bank of India

The Reserve Bank of India increased its key interest rate by 50 basis points to 5.90%. RBI delivered its fourth consecutive rate hike. In addition to this, the central bank also raised the bank rate to 6.15%. Standing deposit facility rate was adjusted to 5.65% and marginal standing facility rate to 6.15%.

The MPC also decided to remain focused on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth.

The RBI retained its inflation projection for this fiscal year to 6.7% and lowered its GDP growth forecast for FY23 to 7%.

Source: Bloomberg, Reuters, US Federal Reserve, RBI, ECB, BOE, ICICI Direct Research.

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