Currency Outlook: Dollar Index Under Pressure

The dollar index remained under pressure all through last week. The index failed to breach 106 decisively and fell sharply. This fall in the index was much in line with our expectation. On Friday, the jobs data release had added more pressure on the greenback as well as the Treasury yields.

The US nonfarm payroll increased by 206,000 in June, better than the increase of 200,000 expected. But the data for May was revised sharply lower from 272,000 to 218,000. Also, the unemployment rate moved up to 4.1 per cent, higher than 4 per cent expected by the market. Weakness in the US job market has increased the hopes in the market for the Federal Reserve to begin the rate cut at the earliest. As a result, the US 10Yr Treasury yield fell sharply on Friday and dragged the dollar index lower along with it.

At the moment, the market is widely expecting the Fed to cut the interest rate in September. According to the latest economic forecast released by the Fed in June, the door is open for one rate cut this year.

The US Consumer Price Index (CPI) inflation data release is due on Thursday this week. A soft inflation number can add more pressure on the dollar and take it further lower.

Dollar outlook

The dollar index (104.87) has an immediate support at 104.60. A break below it can take the index down to 104. The price action thereafter will need a close watch. A bounce from around 104 can take the dollar index up to 105-106 again. In that case, the 104-106 range will remain intact. But a break below 104 can increase the downside pressure. If that happens, then the dollar index can fall to 102 and even lower.

The region between 106 and 106.50 will be a strong resistance to watch. A sustained rise above 106.50 will be needed to turn the outlook bullish again.

More fall

The US 10Yr Treasury yield (4.28 per cent) rose to test 4.5 per cent last week as expected. However, the yield fell sharply from the high of 4.49 per cent giving back all the gains.

The immediate outlook is negative. The US 10Yr Treasury yield can fall to 4.18 per cent first. A break below 4.18 per cent can drag it down to 4.10 per cent and even 4 per cent, going forward.

Resistances are at 4.35-4.37 per cent and then in the 4.5-4.52 per cent region.

Room to rise

As expected, the euro (EURUSD: 1.0838) has risen, breaking above the resistance at 1.0750. Indeed, the currency has moved and closed above 1.08 as well, which is very positive.

Immediate support is in the 1.0795-1.0775 region. The euro can rise to 1.0890-1.0900 this week. If the currency manages to breach 1.09, then the upside can extend up to 1.0950-1.0970.

Stable and range bound

The Indian rupee (USDINR:83.49) fell last week. The rupee made a low of 83.56 and then oscillated up and down around 83.50 for most part of the week.

Overall, domestic currency continues to remain stable and range bound between 83.30 and 83.65 over the last few weeks. Broadly, 83-83.65 has been the wider range of trade since March this year. This sideways range is likely to continue for some more time. A breakout on either side of 83-83.65 will determine whether rupee will fall to 83.80-84 or rise to 82.80-82.50.