Technical Analysis

Dollar poised near key support

Gurumurthy K | Updated on December 19, 2020

A sustained bounce from there can trigger a short-term corrective rally

The US dollar continues to get beaten down. The Dollar Index was down 1 per cent last week and closed at 89.73, below the support level of 90 that it was expected to hold.

The euro got a push mid-week from the news that the Brexit talk is progressing. The currency surged, breaking above 1.22, and closed the week up by 1.2 per cent at 1.2257.

However, the uncertainty over the Brexit deal being closed before the month-end deadline still prevails. The developments on the Brexit talks will need a close watch in the coming days.


Fed decision

The US Federal Reserve policy meeting last week turned out to be a non-event and failed to provide any support for the dollar.

The Fed left the rates unchanged and indicated that bond purchase will continue until the unemployment and price stability goals are reached. The quantum of bond purchase was kept unchanged at $120 billion per month.

It is to be noted that the European Central Bank (ECB) had increased its stimulus by €500 billion earlier this month to €1,850 billion.

The ECB had also extended the tenor of this stimulus to March 2022 from June 2021.

The US GDP, Personal Consumption Expenditure (PCE) and Housing data are important data releases to watch out for this week.

Dollar near key support

The support at 90 that was expected to hold (as mentioned last week), has been broken. However, another important support is in the 89.60-89.50 band. A dip to 89.60-89.50 range this week is possible as the euro continues to look strong and has the room to rise further. A strong and sustained bounce from the 89.60-89.50 region could give a breather to the dollar. Such a bounce can trigger a corrective rally to the 90.50-91 zone as we enter the New Year. But if the Dollar Index breaks below 89.50, the fall can extend to 89.10-89.00 — then, the above-mentioned corrective bounce can happen.

Euro: Room to rise

The euro (1.2257) retains its momentum, and closed on a strong note last week. The outlook remains bullish. There is room to rise towards 1.2350 — an important resistance to watch in the coming days and which is expected to limit.

The chances are high for the euro to reverse lower from 1.2350 and see a corrective fall to 1.2200-1.2150. The expected corrective fall could aid the Dollar Index to bounce-back from the 89.60-89.50 support zone mentioned above.

Dow Jones: Resistance ahead

The Dow Jones Industrial Average has remained stable in the 29,820-30,350 range over the last couple of weeks. The uncertainty on the next stimulus package prevails.

But hopes that a deal would be reached on the stimulus front is keeping the equities higher.

The Dow can test 30,500 on a break above 30,350. A further break above 30,500 will pave the way for a test of 30,800-31,000 on the upside. The 30,800-31,000 region is a strong resistance.

It will be difficult for the Dow to breach 31,000 immediately as a corrective fall is possible from the 30,800-31,000 resistance zone, which can drag it to 29,000-28,500 going forward.

Rupee struggles

The rupee failed to gain to the full extent from the dollar weakness. Although the currency attempted to break above the crucial resistance zone of 73.50-73.45, it was not able to sustain it. There’s a strong indication that the central bank is continuing to intervene in the market.

Barring the short-lived rise to 73.39 on Thursday, the rupee remained stable above 73.50 all through last week. The rupee made a high of 73.39 during the week and reversed low to close the week at 73.56.

As long as the rupee remains below 73.45, the chances are high for it to weaken towards 73.75-73.80 again. Also as long as the central bank continues to intervene, the chances of revisiting 74 levels cannot be ruled out. There is potential for the rupee to strengthen towards 73, but for that, the central bank will have to stay out of the market.

The writer is a Chief Research Analyst at Kshitij Consultancy Services

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Published on December 19, 2020
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