The Indonesian rupiah retreated against the US dollar ahead of the upcoming interest rate decision by the Bank of Indonesia. The USD/IDR pair jumped to a high of 14,960, which was a few points above this month’s low of 14,616.
Bank of Indonesia’s rate decision
Several emerging market central banks are scheduled to deliver their interest rate decisions. One of them will be the Bank of Indonesia, which will conclude its two-day meeting on Thursday.
Economists believe that the bank will decide to leave interest rates unchanged at 5.75%, where they have been in the past few months. The central bank is worried that Indonesia’s economic growth is slowing as I wrote here.
It is also becoming comfortable with the recent trends in inflation. The most recent data shows that the country’s consumer and producer inflation have been slowing in the past few months. The headline consumer price index dropped to 4.33% in April from the previous 4.97%. In all, inflation has dropped from last year’s high of 5.95%.
In a recent note, analysts at ING argued that the central bank will leave interest rates unchanged until the third quarter and then start cutting to stimulate growth. The report said:
“Our base case would be for Warjiyo to extend his pause until the third quarter before carrying out rate cuts to help support the ongoing economic recovery.”
In a separate report, Bloomberg said that analysts it polled expects the central bank to leave rates intact and then cut them in 2024. They also expect it to cut the reserve ratio to ease liquidity in the country.
Therefore, a rate pause by the central bank will likely have no impact on the USD/IDR since the scenario has been priced in by the market. Before that, the pair will react moderately to the upcoming FOMC minutes.
USD/IDR technical analysis
In my last article on the Indonesian rupiah, I said that it would move to 14,836, which was accurate. Now, the pair has moved slightly above the key resistance level at 14,838, the lowest level on February 2. It has dropped below the 25-day and 50-day moving averages while the Relative Strength Index (RSI) is approaching the overbought level.
Therefore, I suspect that the USD/IDR exchange rate will continue falling as sellers target the year-to-date low of 14,611. A move above the resistance point at 14,970 will invalidate the bearish view.
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