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Is the dollar rally running out of steam? Look at the key indicators

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The risk in global markets has posed several challenges to the Indian rupee versus the US dollar. The Indian currency breached 80 dollar level last month. USDINR declined 6.14% on a year-to-date basis. Most of its emerging market peers have fallen even more.

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The larger question on everyone’s mind is whether rupee will collapse any further. We believe that the rally could run out of steam soon.

The dollar enjoyed similar rally in 2018. It rallied from lows of INR 64.84 in April’18 to highs of INR 74.48 by October’18. This was a straight 7-month rally. However, in the 8th month, USD retreated back to INR 69.70 levels. A similar trend is being witnessed this year too. USD climbed consistently from the lows of INR 73.76 in January’22 to the highs of INR 80.21 in July’22.

USD/INR Price Chart

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From where we stand now, there seems to be a possibility of the dollar losing its sheen. Although one instance does not provide a strong case but there are other pointers too which suggests the same.

The Relative Strength Index (RSI) of USDINR also provides us with another valuable insight. When the RSI is above 70 the chances of dollar prices reversing are high. We have witnessed this seven times in the last 10 years. Currently, the RSI of USDINR is in the overbought zone and trading above 70. This indicates the possibility of depreciation in USD and an appreciation in INR.

USD/INR Performance after RSI crosses 70 levels on monthly charts

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In my past articles, I mentioned that the risk-to-reward ratio is very attractive for investing in India now. Keeping that in mind, Foreign Institutional Investors (FII) after a gap of consecutive 9 months turned net buyers in equities in July’22.

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This bodes well for Indian markets as well as the currency. Healthy capital inflows by the FIIs will provide room for the rupee to strengthen against the dollar.

Given all of the indicators, the odds are stacked in favor of the INR, and the USD may top out soon…

Technical Outlook

Nifty ended the week with gains of 1.35% around 17,390. It seems like the bulls are running out of steam after a terrific rally from the bottom of the 15,200 level in June. Nifty is forming a bearish divergence with RSI on the hourly charts which indicates that the upward momentum is slowing. The index has faced resistance of around 17,500 throughout the week. This level is likely to act as a resistance in the coming week too. On the downside, 17,000 is likely to act as major support for the index.

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Expectations of the week

The upcoming week is going to be eventful for investors with a slew of macroeconomic data releases. Market participants’ attention would be drawn to the inflation figures for the United States and China, which are likely to have an impact on global markets.

Back home, the Indian CPI print will be a key domestic indicator that will provide insight into the state of the economy. Nifty 50 closed the week at 17,397.5, up by 1.39%.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)

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