Anna 
In anticipation of a modest recovery in the U.S. dollar, coupled with potential equity losses and shifting financial flows, the Indian rupee is expected to open with minimal fluctuations on Thursday. Non-deliverable forwards suggest a near-unchanged opening from the previous session’s 83.2750 mark.
A forex trader from a prominent bank remarked on the notable shift in the dollar’s performance and risk dynamics as 2024 commenced. The dollar’s “decent recovery” is anticipated to sustain the interest of USD/INR buyers, according to the trader.
Amidst this economic backdrop, concerns arise regarding the sustainability of portfolio inflows, with expectations that the pace witnessed in December may not persist. The likelihood of unexpected fluctuations in USD/INR is seen as challenging due to this anticipated slowdown in portfolio inflows.
The U.S. dollar index reached a more-than-two-week high during the New York session, a trend influenced by a weakened risk appetite in the market. Concurrently, U.S. equities experienced a retreat, extending a three-day losing streak that saw the S&P 500 Index decline by 1.8%.
In the realm of U.S. bonds, the 10-year yield briefly surpassed 4% before retracting. Both U.S. bonds and equities have faced challenges post the December rally, attributed to a mild pullback in expectations surrounding Federal Reserve rate cuts.
Market sentiment is evolving, with a notable shift in expectations for the Federal Reserve’s policy range. According to CME’s FedWatch Tool, there is now a 29% chance that the Fed will maintain the policy range of 5.25% to 5.5% at its March policy meeting, a significant increase from under 10% a week prior. Additionally, investors are currently pricing in a total of less than 150 basis points of rate cuts throughout the year.
The recently released minutes of the December Fed meeting highlighted progress on inflation and reinforced expectations that the Fed policy rate had likely peaked. The dovish tone of the minutes, emphasizing the risks associated with keeping rates too high for an extended period, aligns with statements made by Fed Chair Jerome Powell during the December press conference. Goldman Sachs noted the dovish undertones in the minutes, particularly regarding inflation progress and potential risks to growth.
