Dollar Index, USD-INR hovering in divergent trading

Forex Cues

• Dollar index holds strong above 103 gain by robust US data and hawkish Fed
• Fed’s Hawkish tone dims expectations for March rate cut
• December retail sales beat expectations, boost dollar index
• Market odds shift: Fed rate cut expectations decrease to 57%
• Dollar index at crossroads: facing resistance at 200-day ema
• USD-INR range-bound between 82.80 and 83.50

Hyderabad: Indian currency was trading 83.10 against the US dollar, a net recovery of 0.34 paise or 0.40 per cent from its life-time low of 83.44 on December 4, 2023.The local unit further fell by Rs2.12 or 2.61 per cent from 80.98 level on January 20, 2023. Despite upward movement of Dollar index, which measures the value of the dollar against a basket of six foreign currencies,USD-INR remains in narrow range. The dollar index rose to over 103 on January 20, 2024, from 100.38 on December 28, 2023.

“In contrast to the Dollar Index’s positive rally from 101.40 to 103.50 in January, the USD-INR exhibited weaker momentum during the same period. USD-INR moved in a sideways trend within the range of 82.80 to 83.50, with a robust support zone at 82.75-82.80, coinciding with the 200-day EMA. Given the divergent directions of the Dollar Index and USDINR, directional trading may prove challenging in the coming days. However, engaging in option writing could be a prudent strategy, considering the anticipated range-bound movement,”Tapish Pandey,research analyst atSMC Global Securities Ltd, told Bizz Buzz.

Further, improved trade balance amid better capital flows has been positive for the rupee.It coupled with the services surplus due to falling imports, may indicate that the current account balance can improve in the near term. Improved trade balance along with better capital flows will be a positive for the rupee.

In international forex market, the Dollar Index gainedtraction on strong US data and Hawkish Fed, while USD-INR holds steady with divergent momentum.

Trade deficit improved for the second consecutive month in December 2023 on the back of higher sequential increase in exports over imports. Services trade balance too improved as imports contracted.

Pandey further stated that “the Dollar Index maintained its position above 103, poised for a weekly gain buoyed by robust US data and a more hawkish stance from Federal Reserve officials. This shift in tone tempered expectations of an imminent interest rate cut in March. Particularly noteworthy was Thursday’s data revealing a surprising decline in initial jobless claims to 187K, marking the lowest level since September of the previous year. Additionally, December’s retail sales surpassed expectations.”

Federal Reserve Governor Christopher Waller, aligning with the sentiment of other officials, underscored the strength of the US economy. He suggested that policymakers have the flexibility to navigate carefully and slowly rather than opting for aggressive policy easing. Consequently, market expectations for a Fed rate cut in March have receded from 75% to 57%, according to CME’s FedWatch Tool.

Pandey forecasts: “Although the Dollar Index found support near 100.60 in the oversold zone with RSI below 30, recent positive crossovers from the 5 and 21-day moving averages near 102.40, and a breakout from the consolidation range near 102.80, the index faces a notable obstacle at the major 200-day EMA around 103.70. Sustaining above 103.70 or, more securely, above 104 could signal a positive medium-term outlook. Conversely, remaining below 104 may lead to a sideways movement within the range of 102 to 104 for some time. The RSI, hovering around 60, suggests that an immediate rally is limited, indicating a likelihood of consolidation in the current range.”