Rupee once again dropped last week on worsening global risk sentiment, but posted its first weekly gain against the dollar in more than two months as recovers from oversold conditions. Market is eyeing for with the expectations that the Reserve Bank of India will cut interest rates on June 18 are helping spark some hope for the faltering domestic economy, though the rupee will likely remain beholden to global risk factors in the near-term. On Friday, the rupee suffered from falls in global risk assets on the back of the lack of clarity on potential US monetary stimulus, and concerns about Spanish banking woes.

European debt crisis held the risk assets to ransom. Debt trouble in Spanish banking system mounted and over the weekend the troubles nation asked for help from Eurozone. Spain became the fourth euro-zone country to require international financial assistance on Saturday, as Finance Minister Luis de Guindos said the country will ask the European Union for as much as 100 billion euros ($125 billion) in loans to help its struggling banking sector. Spain will be provided with these funds by the Eurozone. Secondly a significant fall in crude oil prices also supported the marginal strength of the Indian currency. Crude oil fell for 5 week before rising marginally last week. Brent crude closed below $100 and the Indian crude oil basket declined significantly. People’s Bank of China cut its one year borrowing and lending rate by 25 bps and expectation of a fresh stimulus by Federal Reserve revived the risk-on play in the market. The Fed is believed to be considering a third round of "quantitative easing," or purchases of Treasury bonds to try to lower long-term interest rates and encourage borrowing. Traders have speculated that a third round, QE3, is under consideration.

European market progress till last week:

Euro fell against the dollar, paring some of the week’s gains as the downgrade of Spain’s sovereign credit rating and on-going concerns over the debt crisis in the euro zone weighed on demand for the single currency. EUR hit 1.2624 the pair’s highest since May 23 before closing at 1.2513 by close of trade last week, rising 0.77% over the week.

The euro tumbled to a three-day low against the greenback after rating’s agency Fitch cut Spain's credit rating by three notches to triple-B on Friday, and indicated that further cuts could still be made as the country struggles to stabilize its fragile banking system. The downgrade came as senior European Union officials prepared to discuss options for financial aid to Madrid in a telephone conference on Saturday morning. Sentiment on the single currency was also hit after official data showed that German imports fell by the most in two years in April, dropping 4.8%, fuelling concerns over the impact of the euro zone crisis on the region’s largest economy. A separate report showed that Italian industrial production fell 1.9% in April, far outstripping expectations for a 0.5% decline. Investors also remained cautious after China announced a surprise interest rate cut on Thursday, which some market participants took as a sign that the world’s second largest economy may be slowing more than previously thought.

Meanwhile, the greenback found support after Federal Reserve Chairman Ben Bernanke warned that the U. S. economy faced “significant risks” arising from the crisis in Europe, but refrained from indicating that the central bank was prepared to implement any fresh stimulus measures. In testimony to a congressional committee in Washington, Bernanke said that the Fed remained "prepared to take action" to protect the U. S. economy and financial system if stresses on the financial system escalate, but stopped short of indicating what these actions might be.

Earlier in the week, ECB head Mario Draghi also disappointed markets hoping for fresh stimulus measures in order to calm investor nerves over the escalating crisis in the euro zone. Draghi said the bank would extend its policy of lending to banks until mid-January 2013 but didn't announce any new three-year lending operations. The ECB left euro zone interest rates unchanged at 1%, in a widely expected decision. In the week ahead, markets will be keeping a close eye on developments in Spain, as Madrid begins to hammer out the details of a rescue package for its banks, while uncertainty over the outcome of Greek elections on June 17 is likely to weigh.

Investors will also be eyeing U. S. retail sales data, as investors try to gauge the strength of the country’s economic recovery. Meanwhile this week will be heavily volatile as in the euro zone, official data is to be published on French industrial production, a key gauge of economic health. On Tuesday the U. S. is to publish official data on import prices as well as a government report on the federal budget balance. The euro zone is to release official data on industrial production, while Germany is to hold an auction of 10-year government bonds. But trader will be more concern towards the US official data on retail sales, the foremost indicator of consumer spending, which accounts for the majority of overall economic activity. The country is also to produce data on producer price inflation, business inventories and crude oil stockpiles. And finally in last 2 days Euro zone will be eyed as official data on consumer price inflation, which accounts for the majority of overall inflation. Meanwhile, the ECB is to produce its monthly bulletin, which reveals the statistical data that the ECB Governing Board evaluated when making the latest interest rate decision, and provides detailed of current and future economic conditions. The US is to round up the week with official data on manufacturing activity in the NY area, the capacity utilization rate and industrial production. The country is also to release preliminary data by the University of Michigan on consumer sentiment and inflation expectations.

Technically: Looking to the news floating in the market a short term jump till 56.00-56.20 can be seen once and a pull back from this level can be seen as RBI rate can be seen. Now market is looking to take support at 55.20, a break below could see a test of 54.48 and whereas resistance is now likely to be seen at 55.94, a move above could see prices testing 56.46.

ACTION: SHORT TIME BUY USDINR @ 55.20-55.30 SL 54.90 TGT 55.80-56.10.

STOP AND REVERSE

SELL USDINR @ 56.20-56.40 SL 56.88 TGT 55.70-55.20-54.60.MCXSX