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The US dollar index continues to retain strength. The index rose 1.6 per cent last week. This rise has taken it well above the key resistance level of 106. The index touched a high of 107.06 before closing the week at 106.68.
Data released last week showed an increase in US inflation. The Headline Consumer Price Index (CPI) rose by 2.58 per cent (year-on-year) in October. This was up from the 2.41 per cent seen in September. Similarly, the Core CPI rose by 3.3 per cent (year-on-year) in October, up from 3.26 per cent in the previous month.
The rise in inflation might slow down the pace of the rate cuts from the US Federal Reserve. That in turn will continue to support the dollar index to go further up.
Dollar outlook
The breakout above 105.50 is positive for the dollar index (106.68). Some resistance is around 107 which can halt the current rally, but temporarily. So, there are good chances to see a short-term correction in the dollar index towards 106-105.50 in the coming weeks.
But as long as the index stays above the 105.50-105 support zone, the outlook will remain bullish. So, eventually we can expect the dollar index to breach 107 decisively and rise to 109 in the coming weeks.
Bullish yields
The expected fall in the US 10Yr Treasury yield (4.44 per cent) from around 4.45 per cent seems to be not happening. There is resistance around 4.50 per cent. But support is available in the 4.20-4.15 per cent zone. As long as the yield stays above 4.15 per cent the bias will be positive to breach 4.5 per cent going forward. Such a break can take the 10Yr Treasury yield up to 4.85-4.9 per cent in the coming weeks.
The yield will now have to fall below 4 per cent to turn the outlook bearish. But that looks unlikely.
Crucial supports
The euro (EURUSD: 1.0540) has declined, breaking below the key level of 1.06. Immediate support is at 1.05. Then the next important support is in the 1.04-1.0350 region. The euro has to stay above 1.0350 in order to avoid a much steeper fall.
A bounce either from 1.05 or 1.0350 can take the euro up to 1.0650-1.07 in the short term.
However, a break below 1.0350 will be quite bearish. It will then increase the chances of the euro reaching parity against the US dollar.
Rupee halts
The fall in the Indian Rupee (USDINR: 84.41) halted last week. The domestic currency was stuck in a narrow range of 84.37-84.42, a mere 5-paise movement all through last week.
There is no change in the view. Support can now be at 84.50. A recovery to 84.20-84.15 is possible if a break above 84.40 is seen. The broad range of trade for now can be 84.10-84.50. Eventually we can expect the rupee to break 84.50 and fall to 84.90-84.95 in the coming weeks.
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