Rupee to gain after Powell's hint at September Fed rate cut

Rupee vs Dollar: The Indian Rupee is likely to gain on Monday after the chair of the US Federal Reserve, Jerome Powell, reiterated further signs of a possible rate cut in September that will send the US Dollar even lower.

The non-deliverable forward market for one month started indicating an open at a stronger position, trading between 83.80 to 83.82 against the US Dollar, as against 83.89 at previous session's close.

Comments by Powell at the Fed's symposium in Jackson Hole on Friday, saying "the time had come for policy to adjust" strengthened market expectations for a rate cut at the Federal Reserve's next meeting, which has pushed the Dollar index DXY=USD to a more than one-year low.

US stocks rose on Friday, while US Treasury yields fell. The effect spilled over onto Asian currencies, with the Indonesian rupiah at the front of the gains.

The fact that a September rate cut had already been priced into the market is indicated, but the reaction to Powell's speech suggests some doubt that it would occur. According to one of the main banks' currency traders, "It seems there were doubters of Powell's shift, and now that it's confirmed, they have joined in."

The Dollar/Rupee pair—the key level of support would be 83.75.

25 bps or 50 bps: Debate over the magnitude of rate cut

The central question that the market is wrestling with at this juncture is whether the Fed will register a rate cut of 25 basis points or 50 bps at the September meeting, with investors additionally looking for further indications about the completion of the 100 bps of rate cuts in 2024.

In a note, ING Bank said the US jobs report, set for release on September 6, is going to be key in the size of the Fed's rate cut next month. The bank further said that if the unemployment rate rises to 4.4 per cent or 4.5 per cent, that could give room to a more aggressive 50 bps rate cut.

Currently, futures markets are pricing in a close to 60 per cent probability of a 25 bps rate cut and 40 per cent for a 50 bps reduction. FEDWATCH.