U.S. Fed Raises Interest Rates By 25 Basis Points, Dollar May Slip Further Till 99.50 Levels: ICICI Direct

ICICI Direct Report

Key Highlights-

The U.S. Federal Reserve decided to raise interest rate by 25 bps to a range between 4.50% and 4.75% and signalled its intention to keep raising them possibly in smaller increments. Hence, the U.S. Fed may go for one more hike by 25 bps in the March meeting taking it up to 5%.

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 acknowledged that the pace of inflation has cooled but the central bank needs more evidence to be confident that inflation is on a sustained downward path.

View on dollar Index and rupee-

• The dollar Index started losing its strength since November 2022 after the U.S. Fed signalled its intention to reduce the pace of rate hikes. With ease in inflation, the Fed has finally acted and hiked the policy rates by just 25 bps after increasing it by 425 bps in the last six policy meets.

• Moreover, yields are tumbling in anticipation that the Fed will take a back seat soon and pause on tightening plans as inflation continued to ease. 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. However, the jobs data remains strong despite economic slowdown. We believe that weakening of jobs data may act as final deterrent for the Fed to pause its rate hike cycle. Growth in wages and salaries has started slowing down comforting central bank that it will not fuel higher inflation.

• Dollar Index after making a high of 114.77 in September 2022 started losing its steam and slipped back to 10 month low near 101 levels. 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 moved below psychological levels of 100 and move towards 99.50 levels.

• U.S. dollar-Indian rupee, after making a life-time high of 83.28 levels in October 2022 corrected back towards 82.00 levels. US$INR is facing strong resistance near 83.00 and failed to breach these levels in the past three months. As long as it sustains below it, the rupee is likely to slip back till 80.25 in the coming month considering ongoing weakness in the dollar and softening of crude oil prices.

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