It was a volatile day for the dollar index. The US inflation data release and the Federal Reserve meeting on Wednesday triggered some wild swings in the greenback. The dollar index declined sharply initially after the inflation data which indicated some cooling in the trend as compared to previous month. The dollar index fell from a high around 105.10 to a low of 104.25. Later after the Fed meeting outcome, the index has recovered most of the loss. It is currently trading at 104.85.

The Fed left the interest rates unchanged as expected at 5.25-5.5 per cent. However, the central bank had made some revisions in its forecast on the future rate cut path and inflation. The unemployment rate and economic growth projections were kept unchanged at 4 per cent and 2.1 per cent respectively, for this year from the previous forecast.

Inflation eases

Inflation data release yesterday gave some breather yesterday. The US Headline Consumer Price Index (CPI) came in at 3.25 per cent (year-on-year) for month of May. This was down from 3.36 per cent seen in April. The Core CPI was at 3.41 per cent (year-on-year) in May compared to 3.62 per cent seen a month ago.

Easing inflation number strengthened the case for a rate in September that the market is expecting. That in turn dragged the dollar index lower.

Inflation projection

The Fed in its economic forecast has revised its inflation forecast for this year slightly higher. The central bank expects the Personal Consumption Expenditure (PCE), the Fed’s inflation gauge to be at 2.6 per cent in 2024. Earlier, in March the Fed had a forecast the PCE to be at 2.4 per cent this year.

Jerome Powell in his press conference indicated that the high inflation numbers in past months had made the central bank to revise its forecast higher. However, he also cited that if the inflation eases in the coming months, then that would not be a concern.

One rate cut only

The recent dot plot in the economic projection shows that the median Fed Fund Rate is to be at 5.1 per cent. That leaves the room only for a 25-basis points (bps) rate cut from current levels. The previous forecast of the median Fed Fund Rate was at 4.6 per cent for 2024. That was an estimated total of 75-bps rate cut, which has now been scaled back to just 25-bps cut by end of the year.

For now, the recent forecast shows that there could be only one round of rate cut for this year. Four meetings are scheduled for the rest of the year.

However it needs to be noted that the dot plot represents currrent expectations of members of the FOMC and is not a guidance. Market expectation is to see a rate cut in the September or November meeting.

Dollar outlook

The dollar index (104.85) has been stuck in between 104 and 105.50 over the last few weeks. Wednesday’s volatile swing has happened well within this range. As such there is no major change in the broader picture. So we have to wait for a breakout on either side of 104-105.50 to get clarity on the next move.

A break above 105.50 will be positive. It can take the dollar index up to 106 initially. A further break above 106 can take the index up to 107.

On the other hand, if the dollar index declines below 104, it will be bearish. In that case, a fall to 103-102 can be seen.

Rupee stable

The Indian rupee has been stable in a range of 83.40-83.58. The level of 83.60 is a very crucial support for the domestic currency. A break below it can see the rupee weakening towards 83.80 and even 84 in the coming weeks.

To avoid this fall, rupee has to sustain above 83.60 and break 83.40. If that happens, the rupee can rise back up to 83.30 and 83.20 again.

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