Currency Outlook: Dollar Remains Mixed, and Range Bound

Barring the volatile move for some time after the US Federal Reserve meeting on Wednesday, the dollar index broadly remained stable in a range last week. The Fed reduced the interest rate by 50 basis points (bps) last week to 4.75-5 per cent. The economic projection released in this meeting has kept the chances open for another 50-bps cut for the rest of the year.

The US Treasury yields have risen well in the second half of the week after the Fed meeting outcome. However, that has not translated into a strong dollar.

Mixed outlook

The near-term view for the dollar index (100.72) is unclear. The index has been stuck in a range of 100.20-102 over the last few weeks. The range can slightly widen to 100-102.25. A breakout on either side of 100-102.25 will determine the next move.

A break above 102.25 will be bullish. It can take the dollar index up to 103-104. On the other hand, a break below 100 will be bearish for a fall to 99-98.

Resistance ahead

The US 10Yr Treasury yield (3.74 per cent) has risen well from around 3.6 per cent last week. However, resistance is near current levels at 3.77 per cent. Failure to breach this hurdle can drag the yield down to 3.6 per cent again. It will also keep the chances high for the yield to break 3.6 per cent and fall to 3.5-3.4 per cent eventually.

A strong break above 3.77 per cent is needed to take the yield to 3.95 per cent and higher. As seen from the chart, such a rise looks less probable.

Bullish bias

The euro (1.1162) has been in a range of 1.10-1.12 over the last few weeks. On the charts, the bias looks bullish. As such, we see a high chance for the euro to break 1.12 in the coming days. Such a break can take the euro up to 1.13-1.14.

Only a strong break below 1.10 will turn the outlook negative. That in turn can drag the euro down to 1.09-1.08 again. But such a fall looks less likely.

A bullish euro indicates that the chances are high for the dollar index to decline below 100, going forward.

Rupee strengthens

The Indian rupee (USDINR: 83.57) strengthened last week breaking above 83.75. This was contrary to our expectation to see the 83.75-84 range remain intact and get a break below 84 eventually. The domestic currency touched a high of 83.48 before closing the week at 83.57.

A crucial resistance for the rupee is at 83.40. As seen from the chart, this resistance is strong. So, it may not be easy for the rupee to surpass this hurdle in the absence of any positive trigger. We can expect the rupee to reverse lower again from around 83.40 and fall back to 83.60 and 83.80 again.

In case the rupee manages to break 83.40, it can strengthen further towards 83.20 and 83, going forward.