The fear of more rate hikes from the US Federal Reserve has emerged in the market again. The minutes of the Fed’s June meeting released last week indicated more rate hikes, at a slower pace though, is on the cards. It is to be noted that the Fed in is forecast in June had left the doors open for another 50-basis point rate hike in the second half of this year.

The US Treasury yields started to move up sharply after the minutes release on Wednesday. The US 10-Year Treasury yield has surged and closed well above the 4 per cent mark last week.  

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However, the rise in yields did not translate into a strong dollar. Indeed, the dollar index has declined sharply on Friday after the jobs data release. The US non-farm payroll increased at a slower pace by 209,000 in June as against the market expectation for a rise by 240,000.

Surge in the US yields coupled with a strong rise in the crude oil priced dragged the Indian Rupee sharply lower last week.

Bullish outlook

The US 10-Year Treasury yield (4.06 per cent) has closed on a strong note last week. The outlook is bullish. As long as it sustains above 4 per cent, there is room to rise further towards 4.2 per cent in the short term. The chances of a extended rise even up to 4.35 per cent cannot be ruled out.

The outlook will turn negative only if the 10-Year yield declines below 4 per cent. In that case, a test of 3.8 per cent on the downside is possible.

Rupee watch
Resistance is at 82.50 and the rupee can weaken to 83-83.10
More weakness

The Indian rupee (USDINR: 82.74) rose to 81.75 initially last week, but failed to sustain. The currency reversed sharply lower and tumbled to a low of 82.75. It has closed at 82.74 in the onshore market. The fall in the dollar index on Friday has given some breather for the rupee in the offshore segment and it has closed at 82.61.

The outlook is bearish. Resistance is at 82.50, which can limit the downside. Rupee can fall to 83-83.10 in the near term. Thereafter, the price action will need a close watch.

Rupee has to breach 82.50 to get some breather and recover towards 82.20.

Dollar vulnerable

The dollar index (102.27) has been oscillating between 102 and 104 over the last few weeks. The price action on the weekly chart indicates strong resistance around 103.50. That leaves the bias negative for the index to break 102. Such a break can take the dollar index down to 101-100.80.

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The strong rise in the euro (EURUSD: 1.0967) above 1.09 on Friday strengthens the bearish case for the dollar index. The euro has been getting strong support around 1.0830 over the last three weeks. This increases the chances for the euro to break above 1.10. Such a break will increase the bullish momentum and can take the euro up to 1.11 and 1.12 in the short term. That, in turn, can drag the dollar index below 102 toward 101-100.80 as mentioned above.