Currency Outlook: Dollar index remains vulnerable to fall more

Posted on by

The dollar index and the US Treasury yields fell last week. The trigger for the fall came from the inflation data release on Wednesday. The US Headline Consumer Price Index (CPI) rose 3.36 per cent (year-on-year) in April. This was down from a 3.48 per cent rise in March. The Core CPI came in at 3.62 per cent in April compared with 3.8 per cent in the previous month.

Softer inflation number keeps alive the hopes of a rate cut. That, in turn, had dragged the dollar index and the Treasury yields lower last week.

However, the fall in the dollar index was much in line with our expectation. Last week, we had said that the dollar index can fall to test its 104.50-104.00 support zone. As it turned out, the index touched a low of 104.08 and then has risen back from there.

Key resistance

The bounce from around 104 is a positive for the dollar index (104.45). But there is a key resistance at 105. The index has to breach this hurdle to become bullish again. Only in that case, the path will get cleared for a rise to 106 again.

Failure to break above 105 can continue to keep the index under pressure. In that case, the dollar index will remain vulnerable to break 104 and see an extended fall to 103.05 or 103.

Follow-through rise

The US 10Yr Treasury yield (4.42 per cent) fell to a low of 4.31 per cent last week. It has then risen back well from the low towards the end of the week. Immediate resistance is at 4.45 per cent. A decisive break above 4.45 per cent and a strong follow-through rise is needed to ease the downside pressure. If that happens, then the 10Yr yield can rise to 4.55-4.6 per cent again this week.

But if the yield turns down again from around 4.45 per cent, then it can fall to 4.3-4.25 per cent this week.

Bullish bias

Contrary to our expectation, the euro (EURUSD: 1.0869) has risen breaking above the resistance at 1.0850. The currency touched a high of 1.0895 and then has come down from there. Strong support is now in the 1.0820-1.0800. As long as it sustains above this support zone, the bias will remain positive. Resistance is around 1.09. A break above it can take the euro up to 1.10 – 1.1020 in the near term.

The euro will now have to fall below 1.08 to turn the outlook negative and fall back to 1.07.

Rupee watch

Rupee will have support in the 83.40-83.45 region and can rise to 83.15 this week

Recovery signs

The Indian rupee (USDINR: 83.33) managed to break 83.40 recovered last week. It had closed at 83.33 in the onshore market and slightly higher at 83.28 in the offshore segment. The price action last week on the charts gives some sign of recovery in the domestic currency.

The region between 83.40 and 83.45 can now be a good support zone for the rupee. The domestic currency can rise further towards 83.15 this week. The price action thereafter will need a close watch.

A strong break above 83.15 will see the rupee strengthening towards 83.00 and 82.90. But a reversal from around 83.15 will drag the rupee down to 83.40-83.50 again. We will have to wait and watch.