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The dollar index has managed to sustain higher in line with our expectation. The inflation data release from the US last week showing an uptick has taken the Treasury yields higher. That in turn has aided the dollar index to bounce back from the week’s low and close higher.
The US Headline Consumer Price Index (CPI) rose 0.5 per cent (month-on-month) in January. This sparked the speculation in the market that the US Federal Reserve will retain its stance of aggressive rate hikes. However, on a year-on-year (y-o-y), the Headline CPI inflation continues to slow down. The Headline CPI rose 6.35 per cent in January compared with 6.44 per cent a year ago. So, unless the inflation shows a turnaround on a year-on-year basis, the chances could be less for the Fed to turn more aggressive.
For the coming week, the US Personal Consumption Expenditure (PCE) – the Fed’s inflation gauge is an important data to watch. It will be released towards the end of the week on Friday.
Supports available
The dollar index (103.86) fell initially last week. However, it has risen back sharply from the low of 102.59. Although the weekly candle looks indecisive, the broader view is still positive.
Strong support is at 103. As long as the dollar index remains above 103, the outlook is bullish. The index can rise to 105-106 in the short term.
Key support below 103 is at 102.50. The outlook will turn negative only if the dollar index falls below 102.50. In that case, the index will come under pressure to revisit 101 and lower levels. But such a fall looks less likely.
Mixed outlook
The resistance at 1.08 mentioned last week on the euro (EURUSD: 1.0695) has held very well. The currency made a high of 1.0803 and has come down sharply. It made a low of 1.0611 and has bounced from there on Friday.
Important support is at 1.06. If the euro sustains above this support, a rise to 1.08 and 1.09 is possible in the near term. Broadly, 1.06-1.09 can be the range of trade for some time. A breakout on either side of 1.06-1.09 will then determine the next leg of move.
Our bias is still negative. As such, we can expect the euro to break 1.06 and extend the fall to 1.05-1.04 in the coming weeks.
Outlook bullish
As expected the US 10Yr Treasury (3.81 per cent) broke above 3.75 per cent and saw a rise towards 3.9 per cent. It made a high of 3.92 and has come off from there. Immediate support is in the 3.75-3.7 per cent region. As long as the yield sustains above 3.7 per cent, the outlook will remain bullish.
Resistance is at 3.9 per cent. A sustained break above it can take the 10Yr yield up to 4 per cent and even higher in the coming weeks.
Crucial support
The Indian rupee (USDINR: 82.83) failed to recover last week contrary to our expectation. The domestic currency fell back to revisit 82.90 levels in the onshore market. Indeed it touched the 83 mark in the off-shore segment. The rupee has recovered slightly from there to close the week at 82.83 in the onshore market.
Important resistance will be in the 82.60-82.50 region. As long as the rupee trades below this resistance, the bias will remain negative. As such the rupee can continue to remain vulnerable to break 83 and fall to 83.50 and even lower levels in the short term.
A strong break above 82.50 will necessarily be needed for the rupee to move up towards 82 against the greenback.
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