Rupee faces pressure as bets on Fed rate cuts ease slightly

The rupee is anticipated to encounter pressure on Wednesday, reflecting a broad rally in the US dollar driven by a minor reduction in expectations for interest rate cuts by the Federal Reserve. 

Non-deliverable forwards suggest a marginal weakening of the Rupee to the US dollar from the previous session's 83.3175.

Asian currencies have started the new year "on a very different note," and the rupee is expected to feel the impact of this shift, according to an FX trader at a bank. 

However, it is noted that during times of risk-off sentiment and dollar rallies, the rupee tends to be a stable currency within the Asian currency space.

The decline in Asian currencies has continued from Tuesday, influenced by the rally in the dollar index on the first trading day of the year. 

The dollar index and Treasury yields experienced an increase, while US equities declined, marking a reversal from the trends observed last month.

Moderation in expectations for Fed rate cuts in the upcoming year has supported the dollar, leading to a rise in US Treasury yields. The odds of the US central bank implementing policy rate cuts at the March meeting have decreased, with investors now expecting slightly less than 150 basis points (bps) of rate cuts in 2024.

The change in rate expectations appears to lack a specific trigger, and some analysts speculate that optimism regarding rate cuts may have been overly extended. This week's releases of various US data, including the ISM manufacturing number on Wednesday and the ISM services and monthly job report on Friday, are likely to influence investor perspectives on rate cuts. 

Additionally, the minutes of the Fed's last meeting are scheduled for release later in the day.

(With Reuters Inputs)