The Indian rupee is expected to experience downward pressure due to resilient U.S. inflation. This inflation has reduced expectations of a significant Federal Reserve rate cut, leading to uncertainty in the Forex market. Many traders are now shifting their focus to the next Fed meeting, where a smaller 25-basis-point (bps) rate cut seems more likely than the anticipated 50 bps cut. As the rupee hovers near its all-time low, market sentiment remains cautious.
U.S. inflation figures exceeded expectations, causing a ripple effect across global markets. Investors have begun adjusting their predictions for the Fed's next moves, dialing back the likelihood of aggressive rate cuts. The slightly higher-than-expected core inflation of 0.3% compared to 0.2% has had a significant influence on the market, with many traders now predicting an 85% chance of a 25 bps cut in the upcoming meeting.
The Indian rupee is poised to open at 83.98-83.99 against the U.S. dollar, a slight decline from its previous session of 83.9775. The currency remains vulnerable and may dip further, potentially breaching its lifetime low of 83.9850. The strength of the U.S. dollar, bolstered by rising U.S. Treasury yields, has put additional pressure on Asian currencies, including the rupee.
Looking ahead, the Indian rupee pressure is likely to remain in a narrow trading range until the Federal Reserve provides more clarity at its September 17-18 meeting. According to Srinivas Puni, Managing Director at QuantArt Market Solutions, while a 25 bps cut seems most likely, there is still a possibility of a total 50 bps cut later in the year, potentially during the November-December period. This ongoing uncertainty could keep the rupee under pressure for the foreseeable future.
In the short term, much depends on how the Federal Reserve responds to market expectations. If the Fed sticks to its current stance and opts for a smaller rate cut, the U.S. dollar may continue to strengthen, adding further pressure to the rupee. However, if inflation data softens in the coming months, we could see some relief for the rupee and other Asian currencies.
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Learn how rising U.S. inflation and Federal Reserve rate cuts are putting pressure on the Indian rupee, and see what to expect.
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