The rupiah closed stronger in Tuesday afternoon trading as market concerns over the conflict between the United States and Iran eased. Nevertheless, market participants remain focused on the direction of the Federal Reserve’s interest rate policy and the process of appointing a permanent governor of Bank Indonesia (BI).

Based on trading data, the rupiah closed 26 points stronger at IDR 17,962 per USD, after previously weakening by as much as 95 points. The position was stronger than the previous trading session’s close of IDR 18,009 per USD.

Economic, Currency, and Commodity Analyst Ibrahim Assuaibi said the rupiah’s appreciation was driven by signs of easing tensions in the Middle East.

He explained that The New York Times reported that US President Donald Trump had halted plans to intensify military operations against Iran after meeting with key advisers and senior government officials. The decision was partly prompted by the Pentagon’s dwindling stockpile of air defence systems.

Previously, the United States and Iran had exchanged attacks for 13 consecutive days. The conflict was triggered by Iranian attacks on commercial vessels near the Strait of Hormuz, which derailed a temporary peace agreement reached by the two countries last June. Tensions escalated further after the Iran-backed Houthi group attacked a Saudi Arabian tanker in the Bab el-Mandeb Strait, raising concerns over global energy supplies.

Meanwhile, market participants are also awaiting the outcome of the Federal Reserve’s monetary policy meeting scheduled for this week. According to the CME FedWatch Tool, the probability that the US central bank will maintain its benchmark interest rate stands at around 62%.

Nevertheless, Ibrahim said the monetary policy outlook would continue to be heavily influenced by developments in the geopolitical situation in the Middle East. Over the past two weeks, global oil prices have surged by approximately 20% due to the conflict involving the United States and Iran over the Strait of Hormuz.

In addition to the interest rate decision, investors are also awaiting a speech by the new Federal Reserve Chair, Kevin Warsh. According to Ibrahim, the market will closely monitor Warsh’s policy direction after he previously expressed relatively hawkish views and established five task forces to evaluate various aspects of the Fed’s operations, including its communication strategy and inflation-control framework.

Domestically, the market initially responded negatively to Perry Warjiyo’s resignation as Governor of Bank Indonesia, as it increased uncertainty amid pressure on the rupiah, foreign capital outflows, and the possibility of higher global interest rates.

However, Ibrahim said the appointment of BI Senior Deputy Governor Destry Damayanti as Acting Governor of Bank Indonesia provided optimism that the central bank would remain committed to maintaining rupiah exchange-rate stability, controlling inflation, and preserving financial-system stability.

Looking ahead, investors will focus on the process of appointing a permanent Governor of Bank Indonesia. According to Ibrahim, the selection of a highly credible figure and a smooth leadership transition will be important factors in maintaining the central bank’s independence and market confidence in Indonesia’s monetary policy.

For tomorrow’s trading, Ibrahim expects the rupiah to fluctuate but close slightly weaker within a range of IDR 17,960 to IDR 18,020 per USD.

This article is published in partnership with Katadata 

Original article here