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The US dollar index began the week on a weak note. The index fell breaking below the support at 111.50 and made a low of 110.05 on Tuesday. However, a sharp rise in the US Treasury yields aided the dollar index to reverse higher from the low. The rise indeed gathered momentum on Friday after the unemployment data release. The unemployment in the US fell to 3.5 per cent in September from 3.7 per cent a month ago.
The incoming data releases from the US are strengthening the case for at least another 75 basis points (bps) rate hike from the Federal Reserve next month. Please note that there is no meeting scheduled for this month. The Fed in its last meeting in September had indicated that another 125-bps increase in the interest rates for the rest of the year.
Data Watch
For the coming week, the US Consumer Price Index (CPI) inflation data release is due on Thursday. The US Core CPI had surged in August. If the data release this week shows a further rise, then that might increase the speculation in the market for a 100-bps rate hike from the Fed in November. That in turn can take the Treasury yields sharply higher and will be very positive for the greenback.
More rise to come
The bounce from the low of 110 last week on the dollar index (112.79) is strong. Immediate support will be at 112-111.50. While the current momentum continues, the dollar index can rise to 114 and even 115 in the short term.
A decisive weekly close above 115 will be very bullish. It will then pave way for the dollar index to test 118-119 on the upside over the medium term.
If the dollar index fails to breach 115 and turns down again, it can fall back to 111-110 and even 109 thereafter. A strong break below 109 will only turn the outlook bearish.
Turning down again
As expected, the euro (EURUSD: 0.9744) witnessed a corrective rise towards 1.00 last week. The currency made a high of 0.9999 and has come off from there. The pull-back indicates that a fresh leg of fall has begun.
Support is at 0.9720-0.9700. The chances are high for the euro to break below 0.97 and fall to 0.9570, and even 0.9500-0.9470 in the coming weeks. The price action thereafter will need a close watch to see if the euro is managing to bounce back or not.
Resistance ahead
The US 10Yr Treasury yield (3.88 per cent) has risen back sharply last week from the low of 3.56 per cent. Key resistances are at 3.95 and 4 per cent. A strong rise past 4 per cent is needed for the yield to move up further towards 4.38-4.4 per cent.
Inability to breach 4 per cent and a pull-back can take the 10Yr down to test the support at 3.73-3.7 per cent. A further break below 3.7 per cent can drag it down to 3.5 and even 3.4 per cent. Such a move will indicate a double-top formation on the charts. As such, the price action around 4 per cent will need a very close watch this week.
Support coming up
The Indian Rupee fell sharply last week. The fall to 82.50 mentioned last week has happened much faster than we had expected. The domestic currency tumbled to a new low of 82.42 against the US dollar last week. It has closed at 82.33 in the onshore market, down 1.2 per cent for the week. However, in the offshore segment, the currency has closed much weaker at 82.82.
An important support is at 82.85 and at 83.10-83.20. If the rupee manages to recover from these supports, then there will be room for it to strengthen back towards 82 and even 81.50. But in case the current momentum continues, the rupee declines below 83.20, it can tumble towards 84.60.
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