MUMBAI: The Indian rupee is expected to open higher against the dollar on Friday after the US inflation reading reinforced expectations that the Federal Reserve would opt for a smaller rate hike at the upcoming meeting.

The rupee was likely to be around 81.20-81.30 per dollar in early trades, compared to 81.55 in the previous session.

The rupee, like its Asian peers, will do very well at the opening, a trader at a Mumbai-based bank said.

It is surprising that the dollar fell this much post the US inflation considering that the market had anyway expected a soft reading, the trader added.

The dollar index tumbled 0.9% to touch its lowest since June after data showed the US consumer price index (CPI) fell for the first time in more than 2-1/2 years in December.

The rupee is poised to test its next resistance level of 81.20, and we reckon it will have a difficult time breaching it, the trader said.

Fed fund futures signal that investors are now almost certain that the US central bank will raise rates by 25 basis points (bps) on Feb. 1.

That compares to the 50 bps hike it delivered in December and four 75-bps hikes prior to that.

Indian rupee upside limited by low forward premiums

“Markets have seized and amplified Fed pivot bets… This relief is grounded on solidifying evidence of dis-inflation squaring with the Fed approaching the end of its tightening cycle,” Mizuho economists wrote in a note. US yields declined with the 2-year falling to near 4.15%.

Asian shares and currencies rose.

Meanwhile, India’s December reading came within the Reserve Bank of India’s target zone for the second month in a row.

The continued softness in inflation may make the RBI opt for a smaller rate hike of 25 bps in February to take the repo rate to 6.5%, which will likely be the terminal rate in this cycle, wrote HDFC Bank economists.