Currency Outlook: Dollar Gains on ECB Move, Focus on Fed Meeting

The dollar index continues to move up. Although the index began the week on a weak note, it gathered momentum and rose sharply towards the end of the week. The major trigger for the rise in the second half of the week came from the European Central Bank (ECB) meeting. The ECB increased their policy rates by 25 basis points. However, the central bank said that the interest rates have reached a level where it can be maintained for long duration. This signals that the ECB can pause their rate hikes for some time going forward.

Fed watch

Under this circumstance, the US Federal Reserve meeting is due this week on Wednesday. Market expects the Fed to keep the rates unchanged at 5.25-5.5 per cent. However, the economic and interest rate projections, to be released this week, will be very important to watch. If projections show more rate hikes than their earlier forecast, then the US Treasury yields can surge and the dollar index can move further higher.

Dollar outlook

The dollar index (105.32) has an important resistance at 106, which can be tested this week. Whether the index is breaking above 106 or not will decide the next move.

A decisive break above 106 will be very bullish. It can open the doors for the index to see 108 and higher levels. On the other hand, a pull back from around 106 can take the index down to 105-104.5 again. In that case, the broader 100-106 range that has been in place since the beginning of the year will remain intact.

The outcome of the Fed meeting on Wednesday will be key in deciding whether the dollar index will break above 106 or not.

Yields bullish

The US 10Yr Treasury yield (4.33 per cent) is getting strong support around 4.2 per cent over the last couple of weeks. Immediate resistance is at 4.35 per cent . A break above it can take the 10Yr yield up to 4.5 and even 4.6 in the short term.

A strong fall below 4.2 per cent will be needed to turn the outlook bearish and drag the yield down to 4.1 and 4 per cent.

Crucial support

The euro (EURUSD: 1.0657) has a crucial support at 1.06-1.0580. The currency can dip and test this support initially this week. The price action thereafter will need a close watch. A strong bounce from this support zone can take the euro up to 1.08-1.09. But a break below 1.0580 will be very bearish. Such a break can drag the currency down to 1.05 and even lower. We will have to wait and watch.

More weakness

The Indian rupee (USDINR: 83.18) has declined and close below 83 last week. The resistance at 82.80 is holding very well and capping the upside for the rupee. Support is around 83.25. A break below it will increase the downside pressure. Such a break can drag the rupee down to 83.70 and even 84 in the short term.

In case the rupee manages to sustain above 83.25, it can oscillate in the range of 82.80-83.25 for some more time.