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Dollar stuck in a narrow range

Gurumurthy K BL Research Bureau | Updated on September 25, 2021

There is still scope for the dollar index to rise to 94 while it stays above 93

The US dollar was broadly range-bound in the past week. The US Dollar Index oscillated between 93 and 93.50. The rise in the index witnessed after the outcome of the US Federal Reserve meeting on Wednesday was short-lived. The index made a high of 93.52, but failed to sustain and eventually fell back to close the week at 93.28. The euro broke below the key support level of 1.17 but did not see a strong follow-through selling. Broadly, the euro traded in the range of 1.1680-1.1760 last week.

Fed outcome

The US Federal Reserve left its policy rates unchanged in the 0%-0.25 per eent range as expected last week. Market was eagerly waiting to hear on the stimulus taper front. The central bank said that the asset purchase taper will begin “soon” but did not say from when. However, the Fed indicated that the taper will end around the middle of next year. The Fed expects inflation to remain higher. It had revised higher the Personal Consumption Expenditure (PCE) — the central bank’s key measure of inflation — to 4.2 per cent for 2021, from its earlier projection of 3.4 per cent. On the interest rate front, the central bank’s dot plot shows that the rate hike cycle can begin in 2022 and see three rate hikes in 2023. However, the Fed in its statement had said that it will wait to begin the rate hike cycle until inflation and employment meet its target.

Dollar: Scope to rise

The dollar index (93.28) has been broadly range-bound between 91.80 and 93.75 for almost two months now. Within this range, as long as the index stays above 93, the chances are high for it to break 93.50 and rise to 93.75 and 94 in the near term. The level of 94 is a crucial resistance to watch. The index has to break above 94 to move up further. On the other hand, if the dollar index breaks below 93 from here, a fall to 92.50 and 92 can be seen. The index has to break below 92 in order to come under pressure for a deeper fall. Overall, the sideways range of 92-94 is likely to remain intact for now. A breakout on either side of this range will then decide the next direction of move.

For the coming week, the US Consumer Confidence data release on Monday will be important to watch, to begin the week. This will be followed by the Personal Consumption Expenditure (PCE) and the Institute of Supply Management’s Purchasing Managers’ Index (PMI) data releases towards the end of the week on Friday.

The euro (1.1718), on the other hand, has to sustain above 1.1680 and rise past 1.18 decisively in order to ease the downside pressure. From a bigger picture, the euro will now have to rise above 1.19 to bring bullishness back into the picture. For now, as long as the currency trades below 1.18, the chances of it testing 1.16 on the downside cannot be ruled out.

Treasury yields surge

The US Treasury yields saw a strong surge towards the end of the week. The US 10Yr Treasury yield surged, breaking above the key level of 1.4 per cent and closed the week at 1.45 per cent. There is an important resistance at 1.5 per cent. Whether the 10Yr yields breaks above it or not will be crucial in deciding the trend, going forward. A sustained break above 1.5 per cent can take the yield up to 1.6-1.7 per cent and may be even higher over the medium term. On the other hand, a pull-back from 1.5 per cent can drag the yield to 1.4-1.3 per cent again. The price action at 1.5 per cent will need a close watch this week.

Rupee: Mixed

The Indian rupee fell to a low of 73.93 ahead of the Fed meeting on Wednesday. However, it managed to recover from there and remained stable below 73.60 for the rest of the week. The near-term outlook is mixed for the rupee. 73.60-73.80 can be a narrow range of trade. A break below 73.60 can take it down to 73.50 and 73.40. On the other hand, a break above 73.80 can drag the rupee lower to 74.

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Published on September 25, 2021

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