The dollar index and the US Treasury yields fell for the second consecutive week. The fall last week was triggered by the US inflation data release on Thursday. The US Headline Consumer Price Index (CPI) inflation rose by 2.98 per cent (year-on-year) in June. This was down from 3.25 per cent (year-on-year) seen in May. The Core CPI rose 3.28 per cent in June, down from a rise of 3.41 per cent seen a month ago.
The soft inflation number has strengthened market hopes for the Federal Reserve to cut the interest rates soon. According to the CME FEDWatch, the expectation for a 25 basis points rate cut has increased to 90 per cent after the release of inflation data, up sharply from 70 per cent last week.
Dollar outlook
The dollar index (104.09) is poised just above a crucial support level of 104. If it bounces back from this support, a corrective rise to 104.50 is possible. But considering the sharp fall over the last two weeks, the bias will continue to remain negative. The index can turn down again from around 104.50 and fall back to 104.
The broader outlook is negative. So, we expect the dollar index to break 104 and fall to 103 initially. A further break below 103 can drag the index down to 102. This fall to 103-102 can happen either from current levels or after a short-lived rise to 104.50.
Key support
The US 10Yr Treasury yield (4.18 per cent) has an important support at 4.13 per cent. A break below it can take the yield down to 4 per cent in the short term. The price action, thereafter, will need close watch.
A bounce from around 4 per cent can give a breather and take the yield up to 4.15-4.20 per cent. But a break below 4 per cent will be bearish. Such a break can drag the 10-year Treasury yield down to 3.9 per cent and 3.8 per cent.
Room to rise
The euro (EURUSD: 1.0907) rose towards 1.09 in line with our expectation. The currency touched a high of 1.0911 last week. Immediate support is at 1.0880-1.0860. The euro can rise to 1.0950-1.0970 this week.
The price action, thereafter, will need close watch. A decisive break above 1.0970 will boost the momentum. That will take the euro up to 1.1050-1.11. But a reversal from around 1.0970 can drag the currency down to 1.09-1.0880 again.
Narrow range
The Indian rupee (USDINR: 83.54) was stuck in a narrow range of 83.40-83.60 all through last week. The near-term outlook remains mixed and unclear. The domestic currency can continue to oscillate in the sideways range. The range of trade can be 83.40-83.60 or 83.30-83.65.
A breakout on either side of this range will determine the next move. A break above 83.30 can take the rupee up to 83.10-83. On the other hand, a break below 83.65 will be bearish. It will drag the rupee down to 83.80 and even 84 going forward.
The price action on the daily chart leaves the bias negative with a possible bearish pattern formation. Thus, chances for the rupee to break 83.65 and fall towards 84 eventually in the coming weeks is high.