By Gaurang Somaiya

The rupee weakened marginally against the dollar with China markets remaining shut on account of the Spring Festival holidays. However, volatility in terms of major crosses and the dollar remained elevated following several economic data releases from the US and other economies. On the domestic front, data showed India’s retail inflation rate decelerated to a three-month low of 5.10% in January due to easing food, compared to 5.69% in December. The rupee was also influenced by the trade balance number that showed India’s Imports rose to $54.41 billion in January and the trade deficit stood at $17.49 billion as compared to $19.8 billion in the previous month. On the other hand, services exports were $32.80 billion as against $27.88 billion in December. Most market participants remained cautious ahead of the important US CPI number that accelerated by 3.1% against an estimate of 2.9% which further pushed forward the expectations of rate cuts by the Fed. The core inflation rate for January came in 0.4% MoM surpassing the consensus and previous figures of 0.3%. The dollar Index rose to about 104.8, the highest level since November on the back of heightened expectations of a delayed Fed rate cut announcement. 

This week, on the domestic front, the focus will be on the RBI policy meeting minutes to gauge a view for the rupee. In its latest policy meeting, the RBI held rates unchanged and maintained its withdrawal of accommodation stance. In the minutes, market participants will be awaiting cues on other officials’ statements on rate cut announcements from the central bank. On the data front, preliminary manufacturing and services PMI from other economies will be important to watch. We expect USDINR(Spot) to trade sideways and quote in the range of 82.80-83.20.

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Global Currencies

The dollar rose to the highest level since November after inflation in the US rose to about 3.1% in January as compared to estimates of 2.9%. The surge in inflation has raised expectations that the Fed rate cut announcement could be delayed and pushed from March to probably June, depending on the growth or deceleration of inflation in the next couple of months. Currently, most market participants are discounting three rate cuts in 2024 but that will also be dependent on the slowing down of the service sector that the Fed will keenly watch. This week, from the US, FOMC meeting minutes and preliminary manufacturing and services will be keenly watched. A hawkish Fed tone could keep the dollar supported at lower levels. We expect the dollar Index to trade with a positive bias and quote in the range of 103.60 and 104.60.

The pound fell in the first half of the week and rose in the latter half of the week following a swing in the economic numbers from the UK. Data showed inflation in the UK rose by 4% year-on-year in January, less than the market expectation of 4.2%. On the other hand, GDP in the UK shrank 0.3% in Q4 as compared to a contraction of 0.1% in the previous quarter. The pound weakened against the US dollar after the release of the data and this week preliminary manufacturing and services PMI are likely to impact the currency. The Japanese Yen is just flirting around the 150 against the US dollar and YTD is down by almost 5% on signs that the Bank of Japan will resist hiking rates even if it exits negative interest rates this year. While inflation in Japan has been gradually slowing, core inflation has exceeded the BoJ’s target of 2% for more than a year. This week, the trade balance number from Japan will be important to watch and is likely to influence the safe haven currency.

(Gaurang Somaiya is a Forex & Bullion Analyst with Motilal Oswal Financial Services. The views expressed are the author’s own. Please consult your financial advisor before investing.)