On Thursday, the Indian rupee was expected to weaken against the US dollar at open, as investors exited risk assets over mounting concerns about global growth.

In early trading, the rupee dropped against the dollar to 81.45, as compared to the closing value of 81.24 in the last session.

On Tuesday, the local currency recorded 0.6% gains, which had mostly been due to inflows of the US dollar.

The challenges

Market analysts said that it would have been challenging for the rupee to move to 81.20 and now the change in risk sentiment means that it is highly unlikely.

There was the biggest decline in the S&P 500 index in more than a month on Wednesday after weak US retail sales data stoked fears on the growth front.

There was a bigger than expected decline in retail sales in the last month of 2022, which means that the overall economy and consumer spending were on a weaker growth path at the beginning of 2023.

In addition, the retail sales data for the month of November was also revised, which showed that the reading was even weaker than before.

The implications

The data shows that the aggressive hikes in the interest rates delivered by the US Federal Reserve have had an impact on economic growth, thereby resulting in a slowdown.

There was a decline in Treasury yields, as investors were convinced by the data that the rate hiking cycle of the Fed may now be nearing its end.

There was a 16 basis points decline in the 10-year government bond yield to 3.37%, which is the lowest it has been since September.

Economists also highlighted the possibility of a 25 basis points increase in the interest rate in the February 1st meeting of the Federal Reserve because of the string of poor data.

They also said that there was a possibility it could be the last hike in the cycle.

Analysis

Market experts said that as there have been major declines in manufacturing and retail sales data and inflation pressures also appear to be cooling, there is a possibility that the end of the hiking cycle is approaching.

The Federal Reserve may soon reach its peak policy rates. Analysts said that the odds of a 25 basis points increase were high for the month of February.

However, they also added that the case for more hikes in the year seemed very unconvincing in light of the latest data.

As a matter of fact, many have predicted that the Fed may actually begin to cut rates by the end of the year, after holding them for a couple of months.

But, this will depend on the data in the first half of 2023, as the US central bank needs to ensure that inflation has really cooled down before it decides to hit a pause.

They are also hoping to ensure a soft landing for the economy, which might become difficult if they continue with the rate hikes.