Rupee May Nudge Higher After Data Indicates Fed May Pause Rate Hikes

Rupee is poised to open higher on Thursday, after largely in-line US inflation data made it more likely the US Federal Reserve will not raise rates at its next meeting.

Non-deliverable forwards indicate rupee will open at around 81.94 to the US dollar compared with 81.9850 in the previous session. Asian peers were mostly higher, but the offshore Chinese yuan weakened to 6.9450 to the dollar.

“We should open a bit lower (on USD/INR), but difficult to see any major move,” a spot trader at a private sector bank said.

“I am watching the yuan and that combined with how (USD/INR) has been, downside looks limited.”

The dollar dropped against its major peers, US yields dropped and US equities rose after the US consumer inflation rate rose by 4.9%, the lowest in two years and marking the tenth straight month of decline. Economists polled by Reuters had expected a 5% print.

The month-on-month and the year-on-year core inflation rate rose 0.4% and 5.5%, matching expectations.

“In our view, this is an encouraging print for the Fed,” BofA Securities said in a note.

“This report should keep the Fed comfortable with a hold in June. However, note that we have one more jobs report and one more inflation print before the June meeting.”

The Fed meets on June 13-14, while US. May jobs data is due on June 2 and inflation on June 13.

Odds of a rate hike at the meeting dropped further, with futures now pricing in just a 6% chance that the Fed will raise rates.

The 2-year US yield dropped to near 3.90% and the inversion between the 2-year and 10-year narrowed to around 50 basis points.