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It has been a volatile week for the Indian rupee. As cautioned in this column last week, the rupee broke the 81.85-82.20 range on the downside, and declined sharply. The currency tumbled to a low of 82.75 last Friday. However, it has recovered well from there over the last two days. The rupee closed at 82.37 on Tuesday.
A sharp rise in US Treasury yields last week was the major factor that dragged the rupee down to 82.75. Treasury yields surged last week after the US Federal Reserve’s June meeting minutes were released. The minutes showed that the central bank will continue to hike rates.
High crude oil prices also weighed on the domestic currency. However, weakness in the US dollar index after the jobs data release on Friday has helped the rupee recover. The dollar index has come down sharply from around 103 on Friday, to 101.75 now. As such, the movement in the dollar index will need a close watch as it is influencing rupee movement.
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Dollar outlook
The short-term view for the dollar index (101.75) is bearish. Resistance is at 102.30. The index can fall to 101-100.80 in a week or two.
The 101-100.80 is a crucial support zone for the dollar index. A decisive break below 100.80 will be bearish from a long-term perspective. Such a break can drag the index down to 100, and even lower in the coming months.
On the other hand, a bounce from the 101-100.80 support zone will keep the broader sideways range intact. In that case, the index can rise to 102-103 and higher levels again.
Overall, price action in the 101-100.80 support zone will need close watch.
Rupee outlook
The near-term outlook for the Indian rupee is positive. The break above 82.50 is significant from a short-term perspective. The level of 82.50 will now act as a strong support for the rupee. As long as the rupee trades below 82.50, the chances for it to strengthen towards 82.10-82.00 this week are high. Thereafter, the price action will need close watch.
If the rupee manages to breach 82, it can strengthen further towards 81.75 and 81.60. But a reversal from around 82 and a subsequent fall below 82.20 will bring the currency under pressure again. In that case, the rupee can fall back to 82.50 and 82.70 again in the coming weeks. So price action in the 82.10-82.00 support zone will need close watch.
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