The US dollar began the week on a sluggish note. But the outcome of the US Federal Reserve meeting on Wednesday gave the necessary trigger for the greenback to bounce back strongly. The dollar index reversed sharply higher from the low of 104.66 and closed the week at 105.58. The US Treasury yields surging after the Fed meeting aided the dollar index to rise sharply.
The US Federal Reserve left the interest rates unchanged at 5.25-5.5 per cent. The forecast for one more rate hike for the rest of the year was also kept unchanged. However, the projections of the median fund rates for 2024 and 2025 were revised higher. In the last forecast, the Fed had projected to median fund rate to be at 4.6 and 3.4 in 2024 and 2025 respectively. The recent forecast shows that the median rates would be at 5.1 per cent and 3.9 per cent respectively for the next two years. That is, if 5.6 per cent (the median fund rate for 2023) is the peak, then 2024 will see only 50 basis points (bps) rate cut, down from 100-bps cut projected earlier. This means that the Fed could hold the rates at the current high levels for more time than expected earlier.
Both the dollar index (105.58) and the US 10Yr Treasury (4.43 per cent) are poised near their key resistance. Key resistances are 106 on the dollar index and 4.55 per cent on the 10Yr Treasury.
The US 10Yr tested 4.5 per cent and has come down from there. The level of 4.55 per cent is a strong trendline resistance. So, the chances are looking high for the current rise in the yield to halt for now. As such, the 10Yr yield can see a pull back towards 4.3 per cent initially and then to 4.2-4.15 per cent eventually.
That, in turn, can keep the dollar index below 106 and take it down to 105 and 104.50 in the near term.
The price action towards the end of last week shows that the euro (EURUSD: 1.0653) has been getting support around 1.0615. Below that, 1.0580 is also an important support for the currency. This keeps the door open for the euro to get a breather now and bounce to 1.0750-1.0800 this week.
Euro will come under more pressure if it breaks below 1.0580. In that case, 1.04 can be seen on the downside.
The Indian rupee (USDINR: 82.94) has recovered sharply after making a low of 83.27 early last week. It touched a high of 82.83 before closing the week at 82.93. Although the volatility was slightly high last week, the movement happened well within the expected range of 82.80-83.25. So, the range is still intact.
The news on India’s inclusion in the JPMorgan Emerging Markets Bond Index gave a positive push for the rupee to move above 83. But it will have to be seen how far can this news stay in place and aid to rupee to move further higher.
Immediate support is at 83.00-83.10. The rupee has to sustain above 83.10 to keep the chances alive of breaking above 82.80 and move up to 82.50. Else, it can continue to oscillate inside the 83.80-83.25 range. It is a wait-and-watch situation now.