Rupee to weaken after Fed rate cut bets pushed to June
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The Indian rupee is poised to decline on Wednesday after U.S. inflation data moderated less than expected, prompting investors to further push back expectations on when the Federal Reserve will slash borrowing costs.
Non-deliverable forwards indicate rupee will open at 83.10-83.12 to the U.S. dollar compared with 83.0025 in the previous session.
The dollar index climbed to the highest level in three months and the two-year U.S. Treasury yield was at a two-month peak. U.S. equities sold off.
On the back of the "decent-sized moves" following the inflation data, USD/INR "should pop higher" at open, an FX trader at a bank said.
"From there, I doubt you will have many traders who will want to chase the move up," the trader said, while pointing out that USD/INR "rarely has much follow through".
Odds of a Fed rate cut in March were down to less than 10% and for May dropped 1-in-3 on signs that U.S. inflation remained sticky. Investors now reckon that a rate cut is likely only in June.
Consumer prices in the U.S. rose 3.1% on-year in January while the core measure increased 3.9%. Economists polled by Reuters had expected a reading of 2.9% on headline inflation and 3.7% on core.
"Today’s miss will embolden the Fed to signal it is in no hurry to cut interest rates with the market moving back to only fully pricing three 25 basis points rate cuts this year, the same suggested by the Fed’s December dot plot," ING Bank said in a note.
At the beginning of this year, investors had priced in more than six rate cuts in 2024.
Focus now turns to the U.S. retail sales and industrial production data due later this week for indications on how the world's largest economy is faring.
Asian currencies were down and equities followed their U.S. peers lower.
KEY INDICATORS:
** One-month non-deliverable rupee forward at 83.18; onshore one-month forward premium at 8 paise
** Dollar index at 104.80
** Brent crude futures down 0.5% at $82.4 per barrel
** Ten-year U.S. note yield at 4.31%
** As per NSDL data, foreign investors bought a net $26.6mln worth of Indian shares on Feb. 12
** NSDL data shows foreign investors bought a net $87.8mln worth of Indian bonds on Feb. 12
