By Dilip Parmar
The Indian rupee registered the biggest weekly decline in two-month following a rebound in the greenback against major currencies. A gauge of the dollar set its best weekly return since February as Treasury yields rose amid an uptick in bets that the Federal Reserve will step up its battle against inflation.
This week the focus will be on Tuesday’s meeting of President Joe Biden, House Speaker Kevin McCarthy and other congressional leaders to discuss budget negotiations to avoid a default. The G-7 meeting will also guide the path of energy prices as the US may impose more restrictions on Russia.
While the debt-ceiling drama and US bank sector woes have been much of the focus across the market, European Union and Japan’s growth number and US consumer survey results do matter for the forex traders this week.
The US dollar rally is likely to persist this week as well, given the uneven setup around the US debt ceiling. US assets will be the primary beneficiaries if there’s meaningful progress toward a resolution. In contrast, a breakdown in talks will prompt global deleveraging that would support the dollar as the world’s reserve currency. A successful raising of the debt ceiling would permit this week’s packed line-up of Fed speakers to guide more hawkish, prompting higher yields and further dollar support.
Euro lost 1.5% last week, its worst performance in nearly two months, as yield spreads weigh on the common currency. The European Central Bank may have to continue raising borrowing costs beyond the summer, according to Governing Council member Joachim Nagel.
The pound ended the week with a loss of 1.4%, the biggest weekly decline since March 10 after Bank of England Chief Economist Huw Pill said inflation has hit a “turning point” and is likely to slow, indication officials are thinking they might be able to pause their rate-hiking cycle; comments followed a weaker-than-expected reading of UK GDP.
(Dilip Parmar, Research Analyst, HDFC Securities. Views expressed are author’s own. Please consult your financial advisor before investing.)