Technical Analysis

Dollar gets a breather

Gurumurthy K | Updated on January 16, 2021

The greenback has room to move up further, before resuming its overall downtrend

The recovery in the US dollar is happening as per expectations. The US Dollar Index fell initially, but managed to recover well in the second half of the past week. The Dollar Index made a low of 89.92 on Wednesday and reversed sharply to close the week on a strong note at 90.78.

The strength in the Dollar Index dragged the euro sharply lower last week. The euro fell sharply, breaking below the key intermediate support level of 1.22. It closed at 1.2076, down 1.2 per cent for the week.

The weakness in the euro indicates that the Dollar Index can continue its upmove this week also.

New stimulus plan

US President-elect Joe Biden announced the details of a $1.9-trillion relief package last week. The stimulus includes direct payment of $1,400, which will be in addition to the $600 direct payments announced in the previous package in December.

Increase in unemployment benefits, minimum wages, aid for educational institutions, etc, are also included in the package.

No impact

The new stimulus announcement did not impact the market much. The Dow Jones continued to trade stable and, in fact, fell towards the end of the week. The price action in equities indicates that Biden’s stimulus plans have all been factored in by the market. So, the current rally in equities is likely to lose steam unless the new US government that takes over on January 20 surprises the market with an unexpected quantum of relief package. According to the news reports, the next stimulus announcement is likely to come out in February.

Dow struggles

The Dow Jones Industrial Average (30,814.26) seems to be struggling to get a strong follow-through rise above 31,000. After hovering around 31,000 almost all through last week, the index fell from the high of 31,223.78 towards the end of the week and closed at 30,814.26.

As long as the index trades below 31,000, a further dip to 30,000 is possible this week. The level of 30,000 is very crucial. A break below it will give an early signal that a top is in place.

Such a break will then drag the Dow to 29,500 and 29,000 in the coming weeks. So, the price action around 30,000 will need a close watch.

If the Dow manages to hold above 30,000, it can consolidate between 30,000 and 31,000 for some time.

Dollar recovers

The US Dollar Index (90.78) has risen well in line with expectations. As mentioned last week, the index can test 91 and 91.50 in the near term. It will have to be seen if it manages to break above 91.50 or not. A break above 91.50 will see the upside extending to 92.

However, the broader trend remains down. So, the upside in the Dollar Index is likely to be capped at 91.50 itself or 92. As such, a fresh fall anywhere for the 91.50-92.00 region is possible in the coming weeks.

Euro: More room to fall

The euro (1.2076) has declined sharply from the high of 1.2350 over the last couple of weeks. The strong fall below 1.22 last week has turned the near-term outlook bearish. The pair can fall to 1.20-1.950 this week.

The region between 1.20 and 1.1950 is a significant support to watch. Considering the resistance at 91.50-92 on the Dollar Index, we can expect the 1.20-1.1950 support zone on the euro to hold and trigger a bounce back towards 1.21-1.22.

Rupee stabilises

As expected, the rupee is stuck in the 73.00-73.50 range. The currency broke above 73 on Thursday, but failed to sustain. It reversed lower from the low of 72.9650 back into the 73.00-73.50 range. The near-term outlook is mixed for the rupee. The 72.90-73.50 range could be a wider range that can be seen for some time.

A break out on either side of the range will then determine whether the rupee will fall to 73.75-74.00 or strengthen towards 72.75-72.50.

On the charts, as long as the rupee manages to sustain above 73.50, the chances are high for it to break 73 and rise to 72.75-72.50 in the coming weeks.

The writer is a Chief Research Analyst at Kshitij Consultancy Services

Published on January 16, 2021

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