The US dollar index has retreated slightly from its high, while the Euro has bounced back from its crucial support level of 1.17 in the past week. However, some strong economic data releases from the US last week could keep the treasury yields higher for some more time and in turn support the dollar .

Also, seen from the charts, there is room on the upside both in the dollar index and the treasury yields to move further up from here, before witnessing a strong reversal eventually over the medium term.

Economic data releases last week from the US for the month of March were robust. The US Consumer Confidence Index surged to 109.7 from 90.4 in February. The Institute of Supply Management’s Production Managers’ Index (PMI) rose to 64.7 in March from 60.8 in the previous month. On the jobs front, the US non-farm payroll (NFP) increased 916,000 from an increase of 468,000 in February.

These data releases could continue to keep the hope up for an economic recovery and the expectation high for inflation to rise, paving the way for the US Federal Reserve to begin raising the interest rates. This could be supportive for yields and dollar index.

Limited upside for dollar index

The break above 93 seen in the dollar index (93.01) last week seems to lack momentum. The index has come off from the high of 93.44 to close just above 93 for the week. The 93 and 94 levels were the crucial resistances mentioned in this column last week and that seems to be holding well as of now in line with our expectation. As mentioned last week, the dollar index can remain in the range of 90-94 for a month or two. Thereafter, a break and fall below 90 can drag it lower to 89-88. This will keep the downtrend intact that has been in place since March 2020.

The US 10-year treasury yield continues to hover below the key resistance level of 1.80 per cent. We reiterate that 1.60 per cent and 1.50 per cent are important supports. As long as the yield remains above these supports, the chances of a break above 1.80 per cent and a further rise to 2 per cent cannot be ruled out in the coming weeks. As mentioned last week, 2 per cent is a strong long-term resistance and a rally beyond it is unlikely. The 10-year yield will have to fall below 1.50 per cent in order to indicate a top in place and confirm a reversal.

Euro (1.1763) extended the fall last week to test 1.17 on the downside as expected. The 1.1850-1.1870 band will be an important resistance zone to watch. As long as the euro trades below 1.1870, the chances of seeing a test of 1.16 cannot be ruled out. From a broader picture 1.17 and 1.16 are very important supports from where we can expect a fresh rally that can take the euro back above 1.20 over the long term. As such, any pull-back from current levels to 1.17-1.16 will be a good buying opportunity from a long-term perspective.

The Dow Jones Industrial Average (33,153.21) remained stable above 33,000 all through the week. The view remains the same.

The 33,500-33,550 (revised up from 33,450 mentioned last week) will be an important resistance zone to watch this week. A strong rise past 33,550 is needed to move further up to 33,700-33,750. But, preference is to see the upside capped at 33,500-33,550 and see a test of 32,000 or even 31,000 – a crucial medium-term support on the downside in the coming weeks.

Rupee recovers

The Indian rupee (73.11) made some wild swings in the truncated week that had only two trading days.

We had expected the rupee to be broadly in the range of 72.10-72.80 last week. But the currency opened with a gap-down at 72.85 and tumbled to a low of 73.58 on Wednesday before recovering and closed at 73.11 for the week.

For rupee 73.50 will be a crucial level and a strong break/close below it will be bearish and it can test 73.80-74 on the downside. But, as long as the rupee remains above 73.50, the chances are high for it to break 73 and strengthen towards 72.70-72.60 this week. We will have to wait and watch.

The writer is a Chief Research Analyst at Kshitij Consultancy Services

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