Advances towards 82.00 as risk-off rebounds, US CPI in focus

  • November 10, 2022
  • USDINR is hovering around the critical hurdle of 81.60 amid the risk-off market mood.
  • Volatility ahead of the US inflation release has underpinned the Greenback against the Indian Rupee.
  • A decline in consumer spending and gasoline prices could impact US inflation figures.

The USDINR pair is attempting a break above the immediate hurdle of 81.60 in the Tokyo session. The asset is gaining bids as the Indian rupee bulls retreated despite a subdued performance by the US dollar index (DXY). Escalating anxiety ahead of the US inflation data release has brought a sense of pessimism in the risk-perceived currencies.

Meanwhile, the alpha generated by the 10-year US Treasury yields has witnessed immense selling pressure. The returns on long-term US government bonds are continuously refreshing their day’s low as a slowdown in the rate hike pace by the Federal Reserve (Fed) looks imminent. The 10-year US Treasury yields are trading at 4.07%, 1.62% lower from its previous close, at the time of writing.

The deviation between current interest rates and the proposed terminal rate is extremely low. However, Economists at ABN AMRO carry a contrary view. They predicted that the Fed will shift its peak higher than the projected terminal rate to 5% (with a 25 bps rate hike in the first two monetary policies in CY2023 after a 50 bps rate hike in December).

Talking over the US inflation data, projections are pointing to a decline in the headline Consumer Price Index (CPI) to 8.0% and core CPI to 6.5%. A decline in consumer spending in the third quarter of CY2022 to 1.4% vs. the prior release of 2.0% might impact the inflation figures. A slowdown in retail demand is a leading indicator, which indicates that the price growth will start declining significantly.

 On the Indian rupee front, price pressures have remained higher than the desired target of 4% in the past three quarters consecutively. Therefore, the Reserve Bank of India (RBI) will likely announce a jumbo rate hike to curtail the roaring inflation.

 Economists at Goldman Sachs have escalated their interest rates projections to 50 bps, instead of 35 bps, at its monetary policy committee (MPC) meeting next month. Also, RBI Governor Shaktikanta Das may elevate interest rates further by 35 bps in February 2023 vs. the prior projections of 25 bps.