It was a volatile week for the currency market. Major central bank meeting outcomes from the US, Europe and Japan triggered some wild swings in the currencies in the second half of the week.

Central bank actions

The US Federal Reserve on Wednesday increased the interest rates by 25 basis points (bps) in line with market expectation. As there was no surprise from the Fed, the dollar lost momentum and fell after this event. However, the greenback regained strength on Thursday after the European Central Bank (ECB) meeting. The ECB also raised the interest rates by 25 bps, but left the doors open for a pause in its next meeting in September. That aided the dollar index to recover sharply.

On Friday, the Bank of Japan (BoJ) surprised the markets by tweaking its yield curve control policy. The bank will continue to allow the 10Yr bond yield to fluctuate plus or minus 0.5 percentage points on either side of its target zero per cent rate. At the same time, it will offer to purchase the 10Yr bonds at 1 per cent fixed rate.

Dollar outlook

The dollar index (101.70) had been moving up well over the last couple of weeks. But key resistances are at 102.30 and 103. A test of these resistances is possible this week. But it’s not very clear yet whether the index will breach 103. A break above 103 can take it up to 104. On the other hand, a reversal from 103 can drag the dollar index down to 101-100 again in the coming weeks.

Yields mixed

The US 10Yr Treasury yield (3.95 per cent) failed to get a sustained rise above 4 per cent. Strong resistance is there at 4.1 per cent. Failure to bounce back above 4 per cent can drag the yield down to 3.8-3.7-3.65 per cent this week.

Broadly, 3.65-4.1 seems to be the trading range within which the yield can oscillate. A breakout on either side of this range will give clarity on the next move.

Supports ahead

The euro (EURUSD: 1.1016) has been falling over the last two weeks. There is room to fall more from here. Strong supports are at 1.09 and 1.08. We expect the euro to reverse higher from the 1.09-1.08 support zone and rise back to 1.1150-1.1200 in the coming weeks.

 The outlook will turn bearish only if the euro breaks below 1.08. That will bring in the danger of the currency tumbling to 1.06 and lower. But that looks less probable.

Rupee watch
Rupee can weaken and fall towards the lower end of its broad 81.50-83 range
More weakness

The Indian Rupee (USDINR: 82.25) failed to sustain the gains witnessed initially last week. The domestic currency fell sharply from its high of 81.67 giving back all the gains.

Broadly, the rupee has been oscillating between 81.50 and 83 since March. Within this range, the recent fall from 81.67 leaves the chances high for the rupee to decline further towards 82.70-82.80 and even 83 – the lower end of the range in the coming weeks.

Resistances are at 82.15 and then in the 82.00-81.90 region. They can cap the upside in the near term and will drag the rupee down to 82.70-82.80 in the short term.

Related Topics