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ICICI Direct Report
Key Highlights-
The U.S. Federal Reserve decided to raise interest rates by 25 basis points to a range between 5.0% and 5.25% but signalled they may be done raising interest rates for now and amplified attention to credit and other economic risk.
Federal Open Market Committee also decided to continue with its balance sheet reduction as announced in May 2022.
U.S. Federal Reserve Chair Jerome Powell pushed back market expectations that FOMC would cut rates this year by saying it would not be appropriate to cut rates this year.
View on dollar index, rupee
We expect the dollar index to continue its downward trend in anticipation that this would be the last rate hike and the Fed to hit the pause button for a while, particularly due to lingering concerns over economic growth and a renewed banking crisis.
Moreover, yields are tumbling as the market expects a possible rate cut by the end of the year rather than just a pause in rate increases. The cumulative effect of last year's aggressive rate hike has been slowing the economy as most economic parameters like housing, manufacturing and consumer spending have started showing weakness. Moreover, the economy is likely to slow even more as the year progresses as lagged effect of Fed aggressive rate hike are beginning to take their toll. Additionally, growth in wages and salaries has started slowing down, comforting the central bank. Furthermore, the central bank noted that the strains that emerged in the banking sector in early March may result in even tighter credit conditions for households and businesses, which, in turn, will weigh on economic activity, hiring and inflation.
The dollar Index, after making a high of 105.88 in March 2023, again started losing steam and slipped back near 101 levels. The dollar Index is facing strong resistance near 103. As long as it sustains below this level, the downtrend may remain intact. We expect the dollar index to eventually move towards psychological levels of 100.
U.S. dollar-Indian rupee has failed to breach 83 levels in the past of couple of months. We still expect it to work as a stiff resistance but now it will first face hurdles near 82.50 levels. As long as it sustains below it, the rupee is likely to appreciate till 81.0/80.80 levels in the coming month considering ongoing weakness in the dollar and softening of crude oil prices.
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