The Indian Rupee opened weaker against the US Dollar on Wednesday, with USD/INR near 94.85 as the Dollar marked a fresh annual high on expectations the Federal Reserve will deliver at least two rate rises. The US Dollar Index was up 0.1% at about 101.50. CME FedWatch put the odds of any rate hike this year at almost 86%, and the chance of at least two hikes at 48.3%. That compares with projections for two cuts before the Middle East war, which pushed up inflation pressures. Core CPI rose to 2.9% in May, the highest in seven months, and markets are focused on Thursday’s May core PCE forecast of 3.4% YoY versus 3.3%.
Oil extended losses as traffic through the Strait of Hormuz, which handles almost 20% of global energy supply, appeared to normalise; MCX Crude for 20 July fell 0.7% to around 6,900, a three-month low. In Indian equities, Foreign Institutional Investors were net buyers on Tuesday by Rs. 17.86 crore after selling Rs. 635.91 crore on Monday. Technically, USD/INR remained capped by the 20-day EMA at 94.9877, with reference levels at 95.2926 and 97.1183; RSI was 47.84. Support sits at 94.03, with 93.46 below, while resistance is near 95.00 and 95.29.
Drivers Of The Stronger Dollar And USD/INR Upside Potential
Based on today’s conditions, we are seeing the US Dollar strengthen significantly, pushing the USD/INR pair towards 94.85. This is primarily driven by market expectations, now at 86%, that the Federal Reserve will raise interest rates this year due to persistent inflation. This strong dollar environment puts immediate upward pressure on the currency pair.
The critical event this week is the US Core PCE inflation data, the Fed’s preferred measure, which is expected to rise to 3.4%. A number at or above this forecast will likely lock in the hawkish Fed stance, giving us reason to believe USD/INR could test resistance near 95.00. We should consider positioning for this potential upside in the very short term, possibly through futures or call options.
Oil, FII Flows, And Near-Term Trading Strategy
However, a conflicting signal is the falling price of oil, with MCX Crude hitting a three-month low. This is a significant positive for the Indian economy and should, in theory, provide support for the Rupee. The recent easing of tensions in the Strait of Hormuz appears to be making this trend more sustainable for now.
Despite this benefit from lower oil, we note that foreign institutional investors remain hesitant, reflecting a broader trend of caution towards Indian equities. Recent FII net outflows from the equity market, which exceeded $2.8 billion last month, show that global capital is not yet convinced by India’s domestic story. This lack of foreign investment provides a headwind for the Rupee.
Given these opposing forces—a strong dollar versus cheaper oil—we anticipate increased volatility rather than a clear one-way trend. The technical picture also shows the pair is nearing significant resistance, a level where the Reserve Bank of India has historically intervened to smooth out volatility. Therefore, a sustained breakout above 95.30 seems unlikely without a major new catalyst.
For derivative traders, this suggests that strategies profiting from volatility, such as purchasing straddles ahead of the PCE data release, could be advantageous. If we see the pair fail to break resistance after the data, we might consider selling call spreads to capitalize on the range-bound price action we expect to follow. This approach allows us to navigate the uncertainty created by the conflicting fundamental drivers.
