It was a volatile week for the greenback. The US dollar index first rose sharply from the low of 110.52 to make a high of 113.15 after the US Federal Reserve’s policy meeting outcome on Wednesday. The Fed increased the interest rates by 75 basis points (bps) as expected. Market was expecting the central bank to indicate a slow down in its rate hikes. But the Fed Chairman Jerome Powell said that it is early to think about pausing the rate hikes. The Fed retaining its hawkish stance triggered a sharp fall in the risky assets such as equities and took the Treasury yields higher. That, in turn, pushed the dollar index sharply higher.
Spoil sport
The jobs data release on Friday played a spoil sport. Although the US added 261,000 to its non-farm payroll, much more than the market’s expectation of an increase by 200,000, the employment rate showed a rise. The unemployment in the US rose to 3.7 per cent in October from 3.5 per cent a month ago. Mixed job numbers brought back the hopes in the market that the Fed could consider slowing down the pace of its rate hike. As a result, the US dollar index fell sharply on Friday giving back almost all the gains made during the week.
For the coming week, the US Consumer Price Index (CPI) inflation data release on Thursday is important to watch. The Core CPI has been rising over the last few months. It will have to be seen if it’s showing any sign of cooling down or not.
Outlook mixed
The near-term outlook for the US dollar index (110.88) is not very clear. Immediate support is at 110. Below that 109 is the crucial support to watch. Key resistances are at 113 and 114.
Failure to breach 113 followed by a sharp fall on Friday leaves the bias slightly negative. As such there are chances for the dollar index to break 110 and fall to 109.5-109 in the coming days.
As mentioned last week, the dollar index must sustain above 109 to avoid a steeper fall to 107-106.
For now, we expect a range of 110-113 (narrow) or 109-114 (broad) on the dollar index. A range breakout will give clarity on the next trend.
Resistance ahead
The euro (EURUSD: 0.9957) has risen back sharply from the low of 0.9730. There is room to move further up towards 1.0050-1.0065 – a strong resistance zone. Whether the currency manages to breach 1.0065 decisively or not will give us a cue on the next move. A sustained break above 1.0065 will be bullish. Such a break can take the euro up to 1.0400-1.0450.
On the other hand, a pull-back from the 1.0050-1.0065 resistance zone can drag the euro down below parity towards 0.98-0.97 again. The price action in the 1.0050-1.0065 will need a close watch.
Range intact
The US 10Yr Treasury yield (4.16 per cent) is retaining its sideways range. Within this range, the yield fell to a low of 3.92 per cent and then rose back sharply after the Fed meeting outcome. The 3.9-4.33 per cent range remains intact. A breakout on either side of this range will determine whether the 10Yr Treasury yield can rise to 4.5 per cent and higher levels or fall to 3.7 per cent and lower levels. It is a wait-and-watch situation.
Near-term bullish
The Indian Rupee (82.44) weakened initially last week. The domestic currency fell to a low of 82.93, but then managed to recover from there. It has closed at 82.44 on the onshore market. However, the sharp fall in the dollar index in the US sessions has taken the Indian rupee sharply higher to 81.96 on the offshore segment. This increases the chances for the rupee to open with a gap-up on Monday in the onshore market.
Intermediate support can now be around 82.50. We retain our bullish view of the rupee strengthening towards 81.40 this week. The price action there after will need a close watch. If the rupee manages to break above 81.40 decisively, it will be very bullish for it to strengthen towards 80.50 and even 80 going forward. On the other hand, a reversal from 81.40 can drag the domestic currency down to 82 and 83 again.