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The rally in the US dollar index and the Treasury yields gained momentum last week. The US inflation data release on Wednesday last week gave a boost for the greenback and the yields.
The US Headline Consumer Price Index (CPI) inflation rose 3.48 per cent (year-on-year) in March. This was up from the 3.17 per cent increase seen in February. The Core CPI inched up slightly by 3.8 per cent in March from 3.76 per cent a month ago. High inflation data has dashed the hopes for the interest rate cuts to begin in June. This can continue to keep the dollar and yields higher for some time.
Dollar index: Bullish
The dollar index (106.04) has made a strong break above 105. The rise to 106 has happened in line with our expectation.
The outlook is bullish. Immediate support will be in the 105.50-105.30 region. Below that, 105 will be the next strong support. The dollar index can rise to 107-107.50 in the coming weeks.
The price action thereafter will need a close watch. A reversal from the 107-107.50 region can take the index down to 106-105 again. On the other hand, a sustained break above 107.50 will be very bullish from a long-term perspective.
Yields: Resistance ahead
The US 10Yr Treasury yield (4.52 per cent) surged to a high of 4.59 per cent last week. It has good support now at 4.4 per cent. Resistance is around 4.65 per cent. A break above it can take the 10Yr yield up to 4.75-4.85 per cent in the short term.
The US 10Yr Treasury yield will have to decline below 4.4 per cent to become bearish again. Only in that case, a fall to 4 per cent will come into the picture again.
Euro: Bearish
The euro (EURUSD: 1.0643) has declined breaking below the support at 1.0760. Immediate support is in the 1.0630-1.0600 region. It might hold on its first test and produce a corrective bounce. But the upside can be capped by the resistance in the 1.0700-1.0720 region.
As long as the euro trades below 1.0720, the outlook will remain negative. As such, we can expect the euro to break 1.0600 if not immediately but eventually. Such a break can drag it down to 1.0500-1.0450 in the coming weeks.
Rupee: Weaken more
The Indian Rupee (USDINR: 83.42) fell sharply on Friday giving back all the gains made during the week. The strength in dollar can keep the domestic currency under pressure. The level of 83.55 is a crucial support. The chances are looking high for the rupee to decline below this support on the back of dollar strength. In that case, the rupee can fall to 83.75 initially. A further break below 83.75 can drag the rupee down to 84-84.50 over the medium term.
In case the rupee manages to sustain above 83.55, then it can recover towards 83.30-83.20 and even higher. That would keep the 83-83.55 range intact.
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