USD/IDR: Indonesia rupiah braces for more weakness

The USD/IDR exchange rate pumped to its highest point since December 14th as the US dollar index (DXY) jumped and after the dovish rate decision by Indonesia’s central bank. The pair surged to a high of 15,633, much higher than the December low of 15,358.

Bank of Indonesia and DXY surge

The USD/IDR pair continued its recovery after the Bank of Indonesia delivered its first interest rate decision. In it, the bank decided to leave interest rates unchanged at 6%, where they have been in the past few months. 

The bank expects to hold rates at the current level for a while as its battle against inflation remains. Analysts at ING Bank expect the BoI to cut rates starting in the second half of the year to supercharge the economy. The statement added:

In its statement, the bank said that it expects that the Indonesian economy will expand by between 4.7% and 5.5% this year. It also expects that inflation will settle between 1.5% and 3.5%, which is within its target range. 

With the Bank of Indonesia done, the focus now shifts to the Federal Reserve, which will hold its first meeting later this month. Most economists expect that the bank will leave rates unchanged between 5.25% and 5.50% in this meeting. 

The key catalyst for the greenback will be the dot plot and the tone of officials. The strength of the recent jobs and inflation numbers mean that the Fed will likely maintain a hawkish tone in this meeting. This explains why the 10-year and 30-year government bond yields have jumped above 4% recently. 

It also explains why the US dollar index has risen above $103 in the past few days and why American equities have slumped.

USD/IDR technical analysis

USD/IDR chart by TradingView

The USD/IDR pair has also rebounded as investors focus on the upcoming Indonesian election scheduled in February. In most cases, currencies of emerging market currencies tend to retreat ahead of a major election. 

Turning to the daily chart, we see that the USD to rupiah pair has been in a strong uptrend in the past few days. This rebound happened after the pair formed a double-bottom pattern at 15,358. In most cases, this pattern is usually a sign of reversal.

The pair is now approaching the neckline of this pattern at 15,673. A break above that level will point to more upside as buyers target last year’s high of 15,960. The alternative scenario is where the pair fails to break above that level and then resumes the downtrend to 15,400.