The rupee has finally broken out of its eight-week long sideways consolidation range between 66 and 67. As expected, the currency fell below 67 in the past week.
The US Fed once again toying with the idea of hiking rates triggered the fall.
The minutes of the Fed’s April meeting, which were released last week, indicated the possibility of a rate hike in June.
As the dollar strengthened, the rupee lost ground and fell to a low of 67.76 on Tuesday. It recovered slightly to close at 67.34 on Wednesday, still down 0.52 per cent for the week.
Since the rupee is largely influenced by the movement in the dollar, the US GDP numbers on Friday will need a close watch. A strong growth number would fuel the hopes of a rate hike and take the dollar higher. The rupee, on the other hand, can get beaten down further.
The Indian GDP data on Tuesday (May 31) and the manufacturing Purchasing Managers’ Index (PMI) on Wednesday (June 1) may also exert pressure on the rupee if these numbers turn out to be weak.
The rupee is also under strain from outflows, with foreign portfolio investors (FPIs) being net sellers of Indian debt for the second consecutive week.
They sold $1.04 billion in the debt segment over the past two weeks. If their selling intensifies, then the rupee may come under pressure and fall further.
Dollar outlookThe dollar index (95.6) has risen, breaking above an important resistance at 95. It can now target 96 in the coming days. A strong break above 96 can take it higher to 96.5 and 96.65. The region between 96.5 and 96.65 is a strong short-term resistance for the index.
A decisive break above this resistance region can see the dollar index targeting 98 thereafter. Support for the index is at 95. Only a strong break below it will turn the near-term outlook negative for a fall to 94.5 and 94.
The outlook for the rupee is negative. Immediate resistances are at 67.15 and 67, which can cap the upside in the currency in the near term. A reversal from any of these levels will keep the rupee under pressure.
The rupee can target 67.85 in the near term. A strong break above it can see the currency weakening to 68.25 in the short term. Such a break will strengthen our medium-term bearish view. It will then increase the probability of the rupee revisiting the previous low of 68.85 recorded in August 2013.
From a long-term perspective, the prolonged consolidation between 66 and 67 followed by a sharp fall below 67 is very significant. This keeps the rupee within the bear channel it has been trading in since 2014. As long as the rupee trades below 66, the recent leg of down move can take the rupee to a fresh low of 70 in the coming months.