Currency Outlook: Dollar has Room to Fall More

Posted on by

The US Treasury yields, and the dollar index witnessed a sharp fall last week. The fall began after the outcome of the US Federal Reserve meeting on Wednesday. The Fed left the interest rates unchanged at 5.25-5.5 per cent. The central bank indicated that the rates will remain higher for more time as the inflation remains high. However, for now the Fed has ruled out the chances of increasing the rates again.

The fall in both the yields and greenback accelerated on Friday after the jobs data release. The US added 175,000 jobs in its non-farm payroll. This was much lower than the market expectation for an increase of 240,000. The unemployment rate inched higher to 3.9 per cent in April from 3.8 per cent a month ago.

There is no major data release scheduled for this week. So, the Fed meeting outcome and the jobs data can continue to weigh on the dollar and Treasury yields for some more time.

Limited downside

The dollar index (105.03) has room to fall more from here. However, strong support is in the 104-103.50 region which can limit the downside. We expect the dollar index to reverse higher again from the 104-103.50 region. Such a bounce will have the potential to take the dollar index up to 106-107 again.

More room to fall

The US 10Yr Treasury yield (4.51 per cent) witnessed a sharp fall last week. It fell to test the 4.5-4.48 per cent support zone. Indeed, it extended the fall to 4.45 per cent before rising back to close the week at 4.51 per cent.

The yield can fall to 4.35-4.3 per cent in the near term. But the price action thereafter will need a close watch. A strong bounce from around 4.35-4.3 per cent and a subsequent rise past 4.5 per cent will be bullish. It can then take the yield up to 4.6-4.7 per cent again.

Resistance ahead

The rise to 1.08 in the euro (1.0761) happened last week as expected. However, the currency could not sustain the rise. It made a high of 1.0811 and then has come down sharply from there.

Cluster of resistance is in the broad 1.08-1.0850 region. As such any rise from here can be capped at 1.0850. A fresh reversal from the 1.08-1.0850 resistance zone can drag the euro down to 1.07-1.06 again. That will keep the danger of the euro breaking below 1.06 and extending the fall to 1.0450-1.04 over the medium term.

Rupee watch

Rupee has to break 83.30 to strengthen towards 83.10-83.00

Support holds

The 83.55-83.60 support zone on the Indian rupee (USDINR: 83.40) is continuing to hold well. The rupee has recovered very well from the low of 83.52 last week. Immediate resistance is at 83.30. A break above it can take the rupee up to 83.10 or even 83.

On the other hand, if the rupee stays below 83.30, it can remain stuck inside the 83.30-83.60 range for some more time.