The rupee made a fresh low of 87.95 versus the dollar on Monday. The sell-off was triggered by the risk-off sentiment after the US President Donald Trump announced a 25 per cent tariff on steel and aluminium imports.
However, there has been a sharp recovery on Monday and Tuesday. The domestic unit gained about 0.74 per cent against the greenback on Tuesday and ended at 86.83.
As per currency market participants, the rupee’s recovery has been due to RBI intervention on both days, where they have been selling dollars and buying rupee.
That said, this might only give a temporary relief as the uncertainties with respect to trade war has not waned. Also, foreign investors have been continuing to sell equities and taking money back, adding more downside pressure to the rupee.
As per NSDL data, the net FPI outflows in equities so far this month have been nearly $900 million. Given the current downtrend in the domestic equity market, further sell-off is likely, which can weigh on the rupee.
Technically too, the bear trend in the local currency remains valid. Below is an analysis of charts.
Chart analysis
The rupee moved up sharply after marking a low of 87.95. However, currently at 86.83, it is near a strong barrier at 86.60. A trendline coincides at this level, making it a strong resistance to cross for the bulls.
That said, before the next downturn, the rupee might consolidate between 86.60 and 87 for a few days. Eventually, we anticipate another fall where it can touch 88 in the near term. On the other hand, a breakout of 86.60 can open the door for a rally to 86.20. But this is unlikely.
The dollar index now seems to have stuck between 107 and 108.50. A breakout on either side will give us the direction of the next leg of trend. Since the index is above 107, there is a bullish bias. So, the chances for a breakout of 108.50 is high. In such a case, it can appreciate to 110, which can drag the rupee to 88.
But if the dollar index slips below 107, it can decline to 105.50. In this scenario, the rupee can gain to 86.20. Nevertheless, the likelihood of this is low.
Rupee outlook
Following a sharp recovery, we expect the rupee to stabilise here and remain within 86.60 and 87.
