It was a volatile week for the Indian rupee. The sudden resignation of the RBI Governor, and a surprise defeat of the ruling government in State Assembly elections, kept the currency market volatile in the past week.
The Indian rupee opened with a wide gap-down at 72.43 on Tuesday last week following the resignation of RBI Governor Urjit Patel. However, a strong recovery in the equity markets after the State Assembly election results, helped the rupee claw back from the low.
The currency strengthened towards 71.51 on Thursday last, and reversed lower again to close at 71.55 on Monday, down 0.3 per cent for the week.
US Fed meet
The Indian rupee may remain stable in the first half of this week. However, volatility is likely to increase in the second half after the US Federal Reserve meeting. The outcome of the much-awaited Fed meeting will be known on Wednesday. A 25-basis-point hike in interest rate has already been factored in by the market. But what the Fed foresees for 2019 will be key to deciding the strength of the US dollar.
If the Fed hints at a slowdown in the pace of rate-hike next year, the dollar may come under pressure. In such a scenario, the rupee may appreciate against the US dollar in the coming weeks.
The US dollar index (97.32) has a key support in the 97.10-97 region and resistance in the 97.80-97.90 zone.
A breakout on either side of 97 or 97.90 will determine the direction of the next move.
A break below 97 will drag the index lower to 96. On the other hand, if the dollar index manages to breach 97.90 decisively, possibly after the Fed meeting, it can gain fresh momentum. Such a move will increase the possibility of the index rallying towards 99 or even 100 in the coming weeks.
It will also increase the pressure on the Indian rupee. The Indian rupee may remain in a narrow range between 71.5 and 72 in the near term. The outcome of the Fed meeting on Wednesday may set the further direction of the move. A break above 71.5 can take the rupee higher to 71. The level of 71, the 21-day moving average, is a key short-term resistance.
Inability to breach this hurdle can drag the rupee lower to 72 again. In such a scenario, a range-bound move between 71 and 72 can be seen for some time. But if the currency manages to rise past the 21-day moving average resistance, there is a strong likelihood of it strengthening towards 70 against the US dollar in the coming weeks.
On the other hand, if the rupee declines below 71.5 in the coming days, it can fall initially to 72. A further break below 72 can drag the currency lower to 72.45 or even 73 again in the coming weeks.