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Dollar remained relatively stable in the past week. The dollar index fell initially last week on news that Russia calling back some of its troops to its base. However, there was no strong follow-through sell-off to drag the dollar sharply lower. The bounce on Friday leaves the bias positive for the greenback. The uncertainty prevailing over Russia’s invasion of Ukraine is more likely support the US dollar on the back of risk aversion in the market.
For the coming week, the US Personal Consumption Expenditure (PCE), the inflation gauge that is closely tracked by the US Federal Reserve is the important data release to watch. It is scheduled to get released on Friday. A strong PCE number will strengthen the case for a 50-basis points (bps) rate hike from the Fed in March itself. It will also increase the speculation in the market for more rate hikes in 2022 than projected earlier.
James Bullard, President of the Federal Reserve Bank of St.Louis, has last week reiterated his inclination for a 50-bps rate hike in March and a total 100-bps increase early by July.
Dollar Index: Bullish
The US dollar index (96.11) has risen back well in the second half of the week from the low of 95.68. The overall view remains bullish. As mentioned last week, 95.50 is an immediate support and 95.20-95 is the next important support. As long as the index sustains above these supports, the chances are high for it to break 97 and rise to 98 in the short-term.
From a medium-term perspective, 98 is a crucial resistance. A strong break above it will pave way for a test of 100 on the upside. The chances of a rise past 98 and a test of 100 will reduce only if the dollar index falls decisively below 95 from here. But that looks less probable on the charts at the moment.
Euro: Can weaken
The support in the 1.13-1.1270 region mentioned last week held well and the euro (EURUSD: 1.1320) witnessed strong bounce from the low of 1.1280. However, the currency failed to break above 1.4 and has come-off from the high of 1.1395. The near-term outlook is bearish. The chances are now high for the euro to break below 1.1270. Such a break can drag it to 1.1220-1.12 in the coming days.
The level of 1.12 is a very crucial support. A strong break below it will increase the downside pressure. Such a break will then pave way for a steeper fall to 1.10-1.08 over the medium-term. In case if the euro manages to sustain above 1.12, it can bounce back and trade in the range of 1.12-1.14 for some time.
Yields: Crucial support ahead
The US Treasury yields remained volatile in the past week. The US 10Yr Treasury (1.93 per cent) yield surged to 2.06 per cent initially but then fell-back sharply to close the week at 1.93 per cent. Risk aversion in the market on the back of the Russia-Ukraine tensions dragged the yields lower.
A key support is at 1.9 per cent. A break below it will turn the near-term outlook bearish. Such a break can drag the US 10Yr Treasury yield down to 1.85-1.8 per cent and even 1.75 per cent in the coming days. In that case the rise to 2.1-2.2 per cent that we have been mentioning over the last few weeks will get delayed.
On the other hand, a bounce from 1.9 per cent will take the yield back up to 2 per cent and will keep the chances alive of seeing 2.1-2.2 per cent levels on the upside from here itself. As such the price action around 1.9 per cent will need a close watch this week.
Rupee strengthens
The Indian rupee (USDINR: 74.67) strengthened sharply last week against the US dollar. The domestic currency fell to a low of 75.71 on Tuesday but then recovered well thereafter. The rupee indeed broke above the psychological level of 75 and closed the week 0.96 per cent higher 94.67.
According to reports foreign banks selling the dollars for their clients to invest in the upcoming Initial Public Offer (IPO) of Life Insurance Corporation of India (LIC) aided the rupee to strengthen sharply.
Important resistance is in the 74.50-74.40 region which can be tested this week. A strong break above 74.40 can see the rupee strengthening further towards 74 in the near-term. On the other hand, a pull-back from the 74.50-74.40 resistance region can drag the rupee lower to 75 and even 75.25-75.50 again. As such the price action in the 74.50-74.40 will need a close watch.
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