Rupee to decline after US data indicates larger Fed rate cut unlikely

The Indian rupee is expected to weaken at open on Monday after US inflation data indicated that the Federal Reserve will not opt for a larger rate cut at this month's meeting.

The 1-month non-deliverable forward indicated that the rupee will open at 83.90 to the US dollar, down from 83.8625 in the previous session.

The local currency was in the 83.80 to 83.96 range last week amid likely equity inflows, possible central bank intervention and dollar payments by importers.

"I expect a similar range to persist this week, with risks balanced on the upside (for dollar/rupee pair)," a currency trader said.

"The range hopefully expands next week, once the US jobs data is out."

Asian currencies struggle

Asian currencies were down to begin the week after recent data points indicated that the Fed might deliver a more conventional 25 basis points rate cut at the Sept. 17-18 meeting. On Friday, data showed that the headline and core PCE index rose 0.2 per cent month-on-month in August, in line with expectations.

This followed the better-than-expected revisions to the US GDP and a slight decline in US initial jobless claims.

Amid the data, investors are pricing in a less than 1-in-3 probability that the Fed will cut rates by 50 basis points in about two weeks' time.

The US August non-farm payrolls data due this Friday could change that. After Fed Chair Jerome Powell's comments at Jackson Hole, the US labour market data is seen as critical to gauge the size of rate cuts.

"The Fed has essentially guided that this is where they're looking most intently and will not tolerate any further weakness," Chris Weston, head research at broker Pepperstone, said.

A weak read, say below 130,000, will likely see the rates market move nearer to price in a 50 bp cut, he said.

Economists polled by Reuters expect non-farm payrolls to rise by 165,000.