Rupee gains sharply as slowing US inflation softens Fed hike fears

Data released late Wednesday showed that US CPI inflation increased by a lesser-than-expected 8.5% in July as against a rise of 9.1% in June

The rupee strengthened sharply against the dollar on Thursday as a lower-than-expected rise in US consumer inflation raised hopes of the Federal Reserve slowing down the pace of rate hikes, dealers said.

At 0930 am IST, the rupee was trading at 79.27 per US dollar as against 79.52 per dollar at the previous close. The domestic currency was also given a boost owing to a sharp rise in equities.

The BSE Sensex and the NSE Nifty were each trading 1 per cent higher at 0930 am IST.

Data released late Wednesday showed that US CPI inflation increased by a lesser-than-expected 8.5 per cent in July as against a rise of 9.1 per cent in June.

While the inflation in the US remains well above the Federal Reserve’s target of 2 per cent, July's inflation print relieved investors as it comes after months of inflation surprising on the upside in the world’s largest economy.

Traders who were earlier fearing a fresh 75-basis-point rate hike by the Federal Reserve in September now feel that the rate hike could be of a smaller quantum. So far in 2022, the US central bank has raised interest rates by 225 basis points.

Higher US interest rates typically cause emerging market currencies to weaken as overseas investors prefer improved returns in the world’s largest economy.

“The probability of a 75 bps (US Fed) hike has now fallen to 43 per cent, down from earlier expected over 70 per cent at the Fed's September meeting. This has dented the dollar,” CR Forex Advisors wrote.

The US dollar index was last at 105.36 as against 106.35 at the previous close.

“The USD/INR pair has entered into a consolidation phase with volatility witnessed in both directions, 80.10 would remain a strong resistance and 78.80 remains strong support for the pair,” CR Forex Advisors wrote.