Technical Analysis

Dollar gains ahead of Fed meeting

Gurumurthy K BL Research Bureau | Updated on September 18, 2021

But can the central bank provide the trigger to break 94 on the dollar index? Wait and watch

The US dollar has risen well for the second consecutive week. The US dollar index rose above the key intermediate resistance level of 93 last week and closed at 93.25.

A sharp fall in the euro had taken the dollar index higher last week. The euro failed to sustain above the key 1.18-1.1780 support zone and tumbled to close the week at 1.1725.

The dollar index gained momentum on Thursday after the US retail sales data release.

US retail sales rose, contrary to the market expectation to see a fall.

The total retail sales in the US rose 0.71 per cent (month-on-month) in August to $618,676 billion after dropping 1.77 per cent in the previous month to $614.313 billion.

The rise in retail sales had increased the expectations in the market for the US Federal Reserve to begin the stimulus tapering.

After this, all eyes will be on the Fed meeting this week on Wednesday. It will be interesting to see how the market reacts to it. It is to be noted that the Federal Reserve Chairman Jerome Powell stating last month that the central bank would begin tapering by the end of this year did not have much impact on the market.

Dollar Index: Bullish

The US Dollar Index (93.25) has room to test 93.75-94 this week. The level of 94 is a crucial resistance, which will have to be broken to boost the bullish momentum. Such a break can then take the index up to 96 and even higher. It will also reduce the danger of the index breaking below 92 and falling back to 90-89 levels. However, a strong trigger will be needed for the index to break 94. Can the US Federal Reserve provide that trigger this Wednesday in its policy meeting? We will have to wait and watch.

Inability to break 94 can drag the index lower and keep it in the 92-94 range for some more time.

Euro: Near support

The euro (1.1725) has declined sharply, breaking below the key support level of 1.1780 last week. The outlook is bearish. The next important support is at 1.17. The price action at 1.17 will need a close watch.

If the euro manages to bounce from 1.17, a corrective rise to 1.18 can be seen this week. But a break below 1.17 will increase the downside pressure and can drag the euro to 1.16 and even 1.15 in the coming weeks. That will depend on whether the dollar index breaks above 94 or not.

Treasury yields: Resistance ahead

The US 10Yr Treasury Yield (1.36 per cent) fell to 1.28 initially, last week. However, the good retail sales numbers aided the yields to rise back and close on a strong note for the week. An important resistance is at 1.4 per cent, which can be tested ahead of the Fed meeting on Wednesday.

A strong break above 1.4 per cent is needed for the yields to move further up towards 1.45-1.5 per cent, going forward. Inability to breach 1.4 per cent can drag the 10Yr Treasury yield down to 1.3 per cent again.

Rupee can weaken

The Indian rupee remained relatively stable and range-bound last week. The domestic currency had closed at 73.48 on the spot market. But the strength in the US dollar had dragged it to close further lower at 73.69 in the off-shore market.

The important resistance at 73.40 mentioned last week has held very well. The rupee made a high of 73.3450 on Thursday and has reversed lower from there.

If the rupee opens below 73.60 — an important support in the spot market — it can then weaken to 73.80-73.85 and even 74 in the coming week. This is more likely to happen in the first half of the week ahead of Wednesday’s Fed meeting outcome.

If the dollar index strengthens, breaking above 94, that can increase the chances of the rupee declining below 74 this week. In that case the rupee can weaken to 74.50 and even lower in the coming weeks.

To sum up, 94 on the dollar index, 1.17 on the euro, 1.4 per cent on the US 10Yr Treasury yield and 74 on the Indian rupee are the crucial levels to watch this week. The outcome of the US Federal Reserve meeting this week will decide whether these levels can be broken or not.

Published on September 18, 2021

Follow us on Telegram, Facebook, Twitter, Instagram, YouTube and Linkedin. You can also download our Android App or IOS App.

This article is closed for comments.
Please Email the Editor

You May Also Like