Dollar strength set to challenge Indian rupee’s tentative recovery on hawkish Fed outlook

MUMBAI: The Indian rupee’s tentative upside momentum on Thursday may face headwinds from a rally in the dollar, fuelled by fading expectations of a Federal Reserve rate cut next month.

The 1-month non-deliverable forward indicated the rupee will open slightly weaker-to-flat versus the U.S. dollar, having settled at 88.5875 on Wednesday.

The rupee is on a potential three-day winning streak, briefly surpassing 88.50 on Wednesday.

Its recovery has been attributed to expectations, of rally and modest inflows.

The rupee has recently shown signs of strength, although its outlook improvement remains cautious and conditional, IFA Global said in a note.

Despite rising optimism over U.S.-India trade deal, the currency is still held back by the dollar momentum and steady importer demand, IFA said.

The dollar index climbed 0.5% on Wednesday to reclaim the 100 mark and inched higher in Asia trading, while U.S. yields rose after the probability of a December Fed rate cut slipped to below one-in-three.

The drop came after minutes of the October Fed meeting showed policymakers expressing concern that further rate reductions could entrench high inflation, with “most participants” cautioning that additional cuts risked inflation becoming sticky.

“Most participants” noted that … further policy rate reductions could add to the risk of higher inflation becoming entrenched, the minutes showed.

Hitting rate-cut odds further, the Bureau of Labor Statistics said it will not publish the October or November employment reports before the Federal Reserve’s meeting in December.

“This lowers the chances of a December rate cut,” Morgan Stanley said in a note, noting that with the U.S. Fed keying off the unemployment rate, officials will be working with data no more recent than September.

The repricing in Fed expectations has been stark — only a month ago, investors were almost certain the Fed would deliver a third consecutive rate cut next month.