Currency Outlook: Dollar and Treasury Yields Tumble

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The US Treasury yields, and the dollar index were beaten down badly last week. The outcome of the US Federal Reserve meeting on Wednesday triggered a sharp fall in both the yields and the greenback. The US Fed left the interest rates unchanged at 5.25-5.5 per cent in line with the market expectation. However, hinting for three rates cuts next year in its economic projection was a major change that triggered the fall in the US yields and the greenback.

The dollar index declined from around 104 to make a low of 101.77 after the Fed meeting. However, the index has bounced back on Friday to close the week at 102.55, down 1.4 per cent. Similarly, the US 10Yr Treasury yield tumbled from around 4.2 per cent to a low of 3.88 per cent. It has closed the week at 3.91 per cent.

The coming week has important data releases. That includes a couple of housing data, GDP numbers and, most importantly, the PCE – the central bank’s inflation gauge. As such, volatility is likely to remain on the back of all the above data releases.

Dollar outlook

The dollar index (102.55) is coming down towards 101.50, as was mentioned last week; this is an important support. If that holds, a bounce back to 104 is a possibility. But a break below 101.50 can drag the dollar index down to 100.50-100 in the coming weeks. Broadly, 100-108 has been the wide trading range since the beginning of this year. So, even if the dollar index moves back up to 104 from here, it can still fall back towards 100 over the medium term.

More fall

The US 10Yr Treasury yields (3.91 per ecnt) had tumbled breaking below the key support level of 4.1 per cent. The outlook is bearish. The levels of 4 and 4.1 per cent are strong resistances. The US 10Yr yield can fall to 3.7 per cent initially and then even to 3.5 per cent in the coming weeks.

To avoid this fall, the yield has to rise past the 4.1-4.2 per cent resistance zone.

Mixed outlook

Contrary to our expectation, the euro (EURUSD: 1.0895) has risen sharply breaking above the 1.08-1.0820 resistance zone. We had expected this resistance to cap the upside and drag the euro down to 1.06. That view has gone wrong.

Immediate support is at 1.0870. Below that, 1.0820-1.0800 is the next important support.

Resistance is at 1.1010. A strong break above it can take the euro up to 1.11-1.12. The euro will come under pressure again only if it declines below 1.08. In that case, it can fall back to 1.07 and lower.

Rupee watch

82.95 is a crucial resistance. A break above it can take the rupee up towards 82.70

Crucial juncture

After continuing to stay stable around 83.30 even after the Fed meeting outcome, the Indian Rupee (USDINR: 83.00) witnessed a sharp rise on Friday. It broke above 83.30 and rose to a high of 82.94 before closing the week at 83.

The level of 82.95 will be a very important resistance. A break above it can take the rupee up to 82.70 this week. But if the rupee fails to breach 82.95, it can fall back to 83.30-83.40 again. In that case, the broad sideways range will continue to remain intact. It is a wait-and-watch situation.