Technical Analysis

Dollar index poised at crucial support

Gurumurthy K | Updated on August 31, 2021

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Gives back gains at end of week on Fed indicating tapering of stimulus

The US Dollar Index fell sharply last week, giving back almost all the gains made in the week earlier. The index fell below 93 on Monday and remained stable thereafter. The fall accelerated again on Friday following the Federal Reserve Chairman Jerome Powell’s speech. The Fed Chairman, in his speech at the Jackson Hole Symposium on Friday, said the central bank would start reducing its asset purchase this year. The Federal Reserve currently purchases $80 billion per month in Treasuries and $40 billion per month in mortgage-backed securities. The total stimulus quantum is $120 billion per month.

On raising interest rates, Powell said inflation and unemployment have to reach the Fed’s target on a sustained basis, which indicates that the Fed might not be in a hurry to increase the rates immediately after ending the asset purchases, and might take time.

The US Dollar Index (92.68) has come down below 93 again. A crucial support is in the 92.50-92.40 region. A break below 92.40 can drag the index down to 91.80 in the coming days. If the index manages to bounce from 92.40, a rise back to 93.50 and even 94 is possible. The price action at 92.40 will need a close watch this week. Also, from a bigger picture, the dollar index will have to fall below 91.80 to come under pressure and fall to 90-89 levels again.

The US 10Yr Treasury yield (1.31 per cent) surged to 1.35 per cent and has come off from there, on Friday. The yield has to sustain above 1.3 per cent in order to keep alive the chances of seeing a rise to 1.4-1.45 per cent. A fall below 1.3 per cent can drag the 10Yr Treasury yield to 1.2-1.18 per cent again. The price action at 1.3 per cent will need a close watch this week.

Euro: Resistance ahead

The euro (1.1792) has surged back above 1.17 and tested 1.18 last week. An important resistance is at 1.1810. The euro has to break above 1.1810 in order to ease the downside pressure. Such a break will pave the way for a further rise to 1.19. However, the currency will need to breach 1.19 decisively in order to negate the danger of seeing a fall to 1.16-1.15 mentioned last week. Inability to break above 1.1810 can drag the euro lower to 1.17 again and will keep it pressured to test 1.16-1.15 on the downside, going forward.

Dow: Higher and stable

The Dow Jones Industrial Average (35,455.80) remained stable and was stuck in a range of 35,150-35,500 last week. The broader view remains the same and bullish. The Dow has room to rise towards 36,000 and 37,000 in the coming weeks. Cluster of supports are in the broad 35,000-34,000 region. The index will come under pressure and turn bearish only on a break below 34,000. But such a break looks less probable at the moment.

Rupee strengthens

The Indian rupee witnessed a strong surge on Friday, breaking above the crucial resistance level of 74. The domestic currency had closed at 73.6850 in the on-shore market but had strengthened further to close at 73.47 in the off-shore market. The resistance at 73.60 has been broken in the off-shore market. In the absence of the central bank’s intervention, the chances are now high for the rupee to strengthen further towards 73 and even 72.50 in the coming weeks while it remains above 73.60.

It is important to note that when the US Federal Reserve announced stimulus taper in May 2013, the Indian rupee tumbled from around 54 to 68 by August 2013, a sharp 21 per cent fall. But this time it is interesting to see that the trend seems to be the reverse after the taper announcement. Does this mean that the market is well-positioned now to absorb the impact of stimulus taper? We will have to wait and watch how things evolve, going forward.

The writer is a Chief Research Analyst at Kshitij Consultancy Services

Published on August 28, 2021

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