Technical Analysis

Will US dollar retains its strength? 

Gurumurthy K |BL Research Bureau | Updated on: Mar 13, 2022

The bounce from the support keeps the broader bullish view intact 

It was a volatile week for the US dollar. The greenback began the week on a strong note as the US dollar index rose to a high of 99.42 on Monday. But the index fell back sharply on Wednesday as the crude oil prices declined sharply. The Brent Crude Oil price fell sharply on Wednesday from around $130 to $110 per barrel. However, the dollar index has recovered sharply again from the low of 97.71 to close the week on a strong note at 99.13, up 0.27 per cent. Strong inflation numbers aided the dollar index to recover. The US Headline Consumer Price Index (CPI) inflation rose 7.91 per cent in February from 7.53 per cent in January. Core CPI, on the other hand, surged 6.42 per cent in February from 6 per cent a month ago.

Surging inflation has now made the case for a 25 basis points (bps) rate hike from the US Federal Reserve this week. But will the Fed surprise the market with an aggressive 50 bps increase? Considering the on-going geo-political tensions the chances are less for that. However, it will be important to see if there is any major change in the forecast for the future. As such the Fed’s dot plot will be very important to keep a close watch. The US Fed meeting outcome is due on Wednesday.

Dollar: Bullish

The support at 97.80 mentioned last week has held very well on the dollar index (99.13) as expected. The index made a low of 97.71 and has risen back sharply from there. This keeps alive the bullish outlook to test 100 on the upside. As mentioned last week, a corrective fall from 100 towards 98.50-98 cannot be ruled out. However, the overall picture will continue to remain positive. An eventual break above 100 will then pave the way for a further rise to 101-102 over the medium term.

Support will be at 97.80. Below that, 97 and 96.50 are the important support levels. From a broader picture, the dollar index will have to fall below 96 to turn bearish.

Euro: Mixed

The crucial long-term support level of 1.08 on the euro (1.0909) was tested. As expected, a strong bounce from there was also seen. However, the euro has failed to sustain the rise. It has come-off sharply from the high of 1.1121 to close the week at 1.0909.

The European Central Bank (ECB) surprised the markets by announcing a faster pace of reduction in its asset purchase. Accordingly, the ECB will end its stimulus under its Asset Purchase Programme (APP) by the third quarter this year. The Pandemic Emergency Purchase Programme (PEPP) will end by this month as planned. However, the ECB’s decision did not aid the currency in any way. The euro fell after the ECB meeting as the dollar strengthened on the back of the US inflation data release.

Last week’s candle on the charts indicates indecision in the market. This keeps the chances high for the euro to remain in the 1.08-1.11 range for some time. Only a strong break below 1.08 will bring in renewed pressure on the currency. Such a break will then open the doors to 1.06 and even 1.04 on the downside. On the other hand, the euro will have to make a sustained rise above 1.12 to indicate a reversal.

Yields rise back

The US Treasury yields have risen sharply contrary to our expectation to see a fall. The US 10Yr Treasury yield (1.99 per cent) has risen back above the key level of 1.9 per cent. The chances of seeing 1.6 per cent on the downside mentioned last week stands negated now. This keeps intact the broader bullish view of seeing 2.1-2.2 per cent on the upside. The outcome of the US Federal Reserve meeting will be very crucial to set the direction for the yields, going forward.

Rupee

The Indian rupee (76.59) fell well below our expected level of 76.85 mentioned last week. The domestic currency made an all-time low of 76.98 against the dollar and then recovered sharply. A sharp fall in crude oil prices aided the rupee to recover. However, the currency found resistance near 76. It fell, giving back some of the gains after testing a high of 76.07.and has closed at 76.59, down 0.56 per cent for the week.

The view remains bearish. Key resistances are at 76.4-76.35, 76 and then at 75.80-75.75. The Indian rupee will have to rise past 75.75 to turn the outlook bullish and strengthen towards 75-74 levels again. As long as it trades below 75.75, the bearish view is intact to see 78 on the downside in the coming days.

Rupee watch
The outlook is bearish; rupee can see 78 on the downside as long as it remains below 75.75.
Published on March 12, 2022
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