Technical Analysis

Dollar retreats as euro recovers

Gurumurthy K | Updated on February 06, 2021

But near-term support keeps alive the chances of a bounce-back in the greenback

The dollar began the week on a positive note. The US Dollar Index rose, breaking above the key level of 91 and continued to trade strong all through the week. However, the rally lost steam in the final session of the week after the US jobs data release on Friday.

The US non-farm payroll increased by 49,000 in January, against the market expectation of 85,000. The slowdown in the job market might keep the hopes high for more stimulus from the US.

The Dollar Index reversed lower as the euro bounced back sharply above 1.20 after the data release. The Dollar Index fell from the high of 91.60 and closed the week at 91.

Dollar: Supports nearby

The break and rise above 91 has confirmed the inverted head and shoulders pattern in the Dollar Index mentioned last week. The neckline at 90.90 will need a close watch this week. A bounce-back from there will keep the bullish view intact of seeing 92-92.50 on the upside mentioned last week.

The levels of 90.70 and 90.50 are important supports below 90.90. The Dollar Index will have to fall decisively below 90.50 to completely negate the chances of the rise to 92 mentioned earler. The price action in the coming week will need a close watch.

On the data front, the US inflation numbers to be released on Friday need to be watched.

Euro: Resistance ahead

As expected, the euro (1.2048) extended its fall last week. Contrary to the bounce-back from 1.20 that was mentioned last week, the currency fell beyond this level and made a low of 1.1952. The bounce-back move from this low gained momentum after the US non-farm payroll data was released last Friday.

The euro has risen sharply and closed above 1.20. It will have to be seen if it manages to sustain above 1.20 and subsequently rise past 1.21 from here. A strong and sustained break above 1.21 is very much needed to bring back the bullishness and take the currency higher to 1.22-1.23 or even higher levels again.

Inability to break above 1.21 from here can continue to keep the euro under pressure and see a decline again. The price action near 1.21 will need a close watch this week.

Equities recover

Global equities bounced back well last week. This has eased the danger of seeing a deeper correction following the sharp fall seen in the last week of January. The fall to 29,500 in the Dow Jones Industrial Average (31,148.24) mentioned last week did not happen. Instead, the Dow rose back well above the key level 30,000 again and closed the week on a strong note.

The danger of seeing a fall to 29,500-29,000 mentioned last week has eased for now. As long as the Dow sustains above 31,000, the outlook is bullish and the chances are high for it to move further up towards 31,500 and 32,000 in the coming weeks.

Range-bound rupee

The rupee fell initially last week, following the revision in the fiscal deficit targets and increased government borrowings announced in the Budget last Monday. The currency broke below 73 and fell to a low of 73.12.

However, it managed to immediately recover from there and retained the 72.90-73.14 range mentioned last week, for most part of the week. Though a break above 72.90 was seen on Friday, it did not sustain.

The rupee reversed lower again from the high of 72.80 and closed the week at 72.92.

The rupee has been trading in the 72.78-73.15 range over the past couple of weeks. This range is likely to remain intact. If the Dollar Index reverses higher again from its support at 90.90 mentioned above, the rupee can fall below 73 again and decline towards 73.15-73.20 this week. A breakout on either side of 72.78-73.15 will determine whether the rupee can fall to 73.50 or strengthen towards 72.50 going forward.

The writer is a Chief Research Analyst at Kshitij Consultancy Services

Published on February 06, 2021

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