The rupiah exchange rate weakened by 6 points, or 0.03 percent, to Rp18,115 per US dollar on Tuesday morning, compared to the previous close of Rp18,109 per US dollar.
Permata Bank Chief Economist Josua Pardede stated that the rupiah weakened because the market was still waiting for US inflation data.
If US inflation is lower than expected and the US central bank's tone is not too tight, he continued, the rupiah has the potential to strengthen again to around Rp18,030–Rp18,080 per US dollar. However, if US core inflation remains high or the US central bank's statement sounds tight, the rupiah could test Rp18,180–Rp18,220 per US dollar.
Markets expect US inflation to slow to 3.9 percent annually in June, but core inflation remains stable at 2.9 percent. Furthermore, the market is awaiting a statement from the US Federal Reserve Chairman on July 14.
"This is important because if core inflation remains stubbornly high, expectations of higher US interest rates for longer will strengthen, the US dollar will become more popular, and the rupiah will come under pressure again," said Permata Bank's Chief Economist.
Oil prices also came under significant pressure, with Brent rising 3.43 percent daily to US$78.6 per barrel and up 29.2 percent since the start of the year. Typically, rising oil prices are negative for the rupiah, as Indonesia remains a net oil importer.
If oil prices remain high, the market will assess additional risks to energy imports, subsidies, inflation, the current account balance, and foreign exchange reserves.
Looking at the domestic side, there is positive sentiment from S&P Global Ratings, which maintained Indonesia's rating at BBB with a stable outlook.
S&P assesses that Indonesia's fiscal and external weakening is temporary and can still be supported by the recovery in state revenues, commodity exports, and the government's commitment to keeping the deficit below 3 percent of Gross Domestic Product (GDP).
However, S&P also highlighted that the rupiah had weakened by around 7 percent in the first semester and that external fiscal pressures still needed to be maintained.
