Dollar weakens on dovish Fed outlook; What to expect next? – CaFE Invest News

By Gaurang Somaiya

Rupee rose to the highest level in a month following suspected dollar inflow and lower trade deficit number in November. Data showed deficit narrowed $20.58 billion in November as compared to $31.46 billion in the previous month. This fiscal, India’s merchandise exports stood at $278.80 billion, down 6.51% annually, while merchandise imports stood at $445.15 billion, down 8.67% annually. On the other hand, India’s inflation grew 5.55% in November as compared to 4.87% in the previous month following an uptick in food inflation.

 The RBI in its December monetary policy statement unveiled last week did anticipate an increase in vegetable prices that could impact CPI number. Industrial production rose 11.7% in October from 6.2% in September, aided by a favourable base, and a rise in manufacturing output amidst festive demand. Reaction on the rupee remained muted as both the numbers were in line with market estimates.

This week, market participants will be keeping an eye on the RBI meeting minutes and expectation is that the comments will be hawkish and that could influence the rupee. On the global front, a few important economic numbers will be important to watch along with the Bank of Japan policy statement. We expect that for the rupee active intervention by the RBI could restrict overall volatility for the currency. We expect the USDINR (Spot) to trade sideways with a lower bias and quote in range of 82.60 and 83.40.

Global Currencies

Dollar was weighed down after the Federal Reserve held rates unchanged and set the table for multiple cuts to come in 2024 and beyond. Dot plot showed that most officials expected rates would end next year at 4.5% to 4.75%. Officials expect rates to fall even lower in 2025, with most officials forecasting they would end up between 3.5% and 3.75%. Dollar Index fell sharply and the benchmark 10-year Treasury yield dropped below 4% for the first time since August.

 Fed Chairman reiterated that the central bank was committed to proceeding “carefully” with future rate decisions given expectations that economic growth would cool and there had been “real progress” on beating back inflation. Weakness in the greenback extended even as inflation in the US fell in November to 3.1% as compared to 3.2% in the previous month. This week, from the US, final GDP, core PCE index and consumer confidence will be important to watch. We expect the dollar index to trade with a negative bias and quote in the range of 101.50 and 103.20.

Euro and pound gained sharply after the Fed decided to hold rates and maintained a dovish stance at its last meeting of the year. Both the currencies were less influenced by the ECB and the BoE policy statement. Euro and pound both continued to gain after the ECB and the BoE held rates unchanged. The ECB signalled an early end to its last remaining bond purchase scheme. 

The ECB is likely to continue to follow a data-dependent approach to determining the appropriate level and duration of restriction. Reaction on the euro was positive after the release of policy announcement. On the other hand, the BoE reiterated that the monetary policy is likely to need to be restrictive for an “extended period of time.” BoE’s policy stance assumes a slow fall in interest rates to 4.25% in three years’ time. 

This week, from the EZ, final CPI will be the only important data to watch. On the other hand, from the UK, CPI and retail sales will be influencing the currency. We expect the both Euro and pound to trade with a positive bias.

Japanese Yen strengthened for the fifth successive week and extend gains together with other major crosses following broad weakness in the Dollar Index. Market participants are cautious ahead of the Bank of Japan policy statement, wherein the central bank is expected to be hawkish and that could extend gains for the safe haven currency. We expect the USDJPY pair to trade with a negative bias and quote in the range of 140.80 and 143.80.

(Gaurang Somaiya, Forex & Bullion Analyst, Motilal Oswal Financial Services. Views expressed are the author’s own. Please consult your financial advisor before investing.)