The US dollar index tumbled over 2 per cent last week. A sharp drop in the US Treasury yields after the inflation data release on Wednesday was the major trigger for the fall. The US Headline Consumer Price Index (CPI) inflation rose 3.09 per cent in June much lower than 4.1 per cent seen in the previous month.
The Core CPI rose 4.86 per cent in June compared with 5.33 per cent a month ago. Easing inflation increased the hopes in the market that the US Federal Reserve would slow down the pace of rate hikes. That dragged the Treasury yields sharply lower and pulled down the dollar index.
The next Fed meeting is on July 26. Market expects the central bank to increase the rates by 25 basis points in this meeting.
Outlook bearish
The US dollar index (99.91) has tumbled breaking below the key support level of 100.80. Any bounce above 100 could be short-lived. The region between 100.80 and 101 will now act as a strong resistance and cap the upside. So, as long as the dollar index trades below 101, the outlook is bearish. The dollar index can fall to 98 and even 96 in the coming weeks.
A strong rise above 101 is necessarily needed for the index to ease the downside pressure. Only in that case, the fall to 98-96 can be avoided. But that looks unlikely as seen from the price action on the charts.
Yields mixed
The US 10Yr Treasury yield (3.83 per cent) failed to sustain above 4 per cent last week and fell sharply. The immediate outlook is mixed. Broadly the yield has been range bound between 3.75 and 4.1 per cent over the last two weeks. If the 10Yr yield manages to sustain above 3.75 per cent, it can rise back to 3.9 and 4 per cent again. But a break below 3.75 per cent can take it down to 3.7 and 3.6 per cent this week. Overall, it is a wait-and-watch situation.
Bullish breakout
The break above 1.10 and the rise to 1.2 on the euro (EURUSD: 1.1228) has happened in line with our expectation. There is a series of supports at 1.1190, 1.1160 and 1.1120. Below these, 1.10 is a very strong support. So, intermediate dips can be short-lived and the downside can be limited. The overall picture is bullish. The euro has potential to target 1.16 in the coming months.
Range bound
Contrary to our expectation to see a fall to 82, the Indian rupee (USDINR 82.17) rose breaking above the resistance at 82.50 last week. The domestic currency made a high 81.94 and has come-off from there to close the week at 82.17 against the dollar last week. In the off-shore segment, the currency has closed slightly higher at 82.05.
The price action indicates the struggle for the rupee to break the 82-81.90 resistance zone. As long as the rupee trades below 81.90, the chances are high for it to fall again towards 82.50 and 82.80 in the coming weeks.
Rupee has to breach 81.80 to get a breather and strengthen towards 81.60 and 81.40. Overall, 81.80-82.80 can be the broad trading range for now.