The US dollar got knocked down badly last week. The dollar index fell 1.3 per cent, ending the two-week narrow consolidation. As such, the short-term outlook has turned bearish for the greenback.
Central Banks’ action
The US Federal Reserve left their policy rates unchanged last week in the 5-5.25 per cent range as expected by the market. However, their dot plot projection showed that another 50-basis point (bp) rate hike is on the cards for the rest of the year. So, there could be two rate hikes of 25 bps each in any two of the next four Fed meetings left for the year.
While the Fed opted to pause after 10 consecutive rate hikes, the European Central Bank (ECB) did not. The ECB increased its policy rates by 25 bps last week. So, the ECB’s main refinancing operations interest rates stands at 4 per cent.
ECB’s rate hike accelerated the upmove in the euro. That, in turn, dragged the dollar index well below the key level of 103 last week.
Bearish outlook
The sharp fall below 103 in the dollar index (102.24) is likely to keep it under pressure. Resistance can now be in the 103-103.50 region. The short-term outlook is bearish. Immediate support is at 102. The dollar index can break 102 and fall to 101-100.50 in the coming days.
Range bound
The US 10Yr Treasury yield (3.76 per cent) has been oscillating in a range — 3.65 per cent to 3.85 per cent — over the last couple of weeks. The immediate outlook is mixed. A breakout on either side of the range will determine the next move.
A break above 3.85 per cent can take the yield up to 3.90 per cent initially. A strong break above 3.9 per cent is needed to strengthen the bullish case. Only in that case a rise to 4-4.1 per cent is possible.
On the other hand, if the yield breaks the range below 3.65 per cent, it can fall to 3.5 per cent.
Gains momentum
The euro (EURUSD: 1.0937) surged last week to close well above the key level 1.09. Important support will now be in the 1.0870-1.0850 region. As long as the currency stays above this support zone, the outlook is bullish. Moving average cross over on the daily chart also strengthens the bullish case. The euro has potential to target 1.11-1.1135 in the coming weeks.
Strengthen more
The Indian Rupee (USDINR: 81.93) has strengthened well last week as expected. It broke the key resistance level of 82.15 and tested 81.85 in line with our expectation. The outlook is still bullish. There is room for the rupee to strengthen more this week.
Immediate support is in the 82.00-82.05 region. Below that, the 82.15-82.25 region is the next strong support zone. The chances are high for the rupee to stay above 82 itself. The domestic currency can strengthen towards 81.60-81.50 this week.
This 81.60-81.50 is a very strong resistance zone. As such, the chances of the rupee reversing lower again towards 82 from there cannot be ruled out.