The rise in the dollar index seems to be losing steam. After an initial rise, the index oscillated around 106 for most part of the week. The US 10Yr yield, on the other hand, witnessed a strong rise on Friday and has closed the week on a strong note. Both the yields and dollar index are showing some kind of divergence, which will need a close watch.
The US Personal Consumption Expenditure (PCE) — the Federal Reserve’s inflation gauge, was released on Friday. The PCE came in at 2.56 per cent (year on year) for June. This was down from 2.68 per cent, a month ago. Easing PCE number strengthens the case for a rate cut from the Fed. Market is now widely expecting the Fed to cut the interest rate in September.
Crucial resistance
The dollar index (105.86) has an important resistance in the 106.30-106.50 region. We expect the current rally in the dollar index to halt in this resistance zone. A reversal from the 106.30-106.50 region can take the index down to 105 in the short term. The chances of the downside extending even up to 104.50 cannot be ruled out.
To avoid this fall, the dollar index has to break 106.50 first and then get a subsequent rise above 107. That, in turn, will boost the bullish momentum. It will also open the doors for the dollar index to target 109-109.50 on the upside.
Room to rise
The US 10Yr Treasury yield (4.4 per cent) has risen sharply after forming a strong base above 4.2 per cent. Immediate support is around 4.32 per cent. The near-term outlook is positive. The US 10Yr yield can rise to 4.5-4.55 per cent in the near term. The price action thereafter will need a close watch to see if the yield is breaching 4.55 per cent or not.
A reversal from the 4.5-4.55 per cent region can drag the yield down to 4.4-4.35 per cent again.
Support holds
The euro (EURUSD: 1.0713) is holding above its support at 1.0660 well. That leaves the chances high for the euro to breach the 1.0730-1.0750 resistance zone. Such a break can take the currency up to 1.08 initially. A further break above 1.08 will then boost the momentum and clear the way for a test of 1.0880-1.09 on the upside.
The euro has to fall below 1.0650 to come under pressure again. Only then the fall to 1.06-1.0550 will come into the picture.
Rupee recovers
The Indian rupee (USDINR: 83.39) managed to sustain well above the support at 83.60 and has recovered last week. Immediate resistance is at 83.25. A break above it can take the rupee up to 83 in the near term.
In case the rupee reverses lower again from around 83.25, it can fall to 83.60-83.65.
Broadly, the 83-83.65 range is intact. Within this, 83.25-83.65 can be the narrow trading range. A breakout on either side of 83-83.65 will determine whether the rupee can fall to 83.80 or strengthen to 82.80.