Technical Analysis

Dollar to consolidate before resuming the broader downtrend

Gurumurthy K | Updated on February 13, 2021

A sideways move of 90-91.50 is possible in the near term

The dollar remained weak all through last week. The US Dollar Index failed to sustain above 91 and fell to a low of 90.25. The euro rising past the key near-term resistance level of 1.21 dragged the Dollar Index lower last week.

On the equities front, the Dow Jones Industrial Average continues to hover at higher levels on the back of the US stimulus support. However, the index seems to lack momentum to further move up further from current levels in the absence any fresh triggers. Overall, a sideways consolidation looks like a possibility before the broader trends resumes in all the asset classes.

 

Stimulus check

The new US government is in the process of making President Joe Biden’s proposal of $1.9-trillion stimulus package into a law. The market is eagerly waiting to see the actual quantum that will get a final approval. According to news reports, the stimulus proposal is likely to come for voting next week and is expected to be passed into a law in the first week of March.

Dollar falls

The US Dollar Index (90.45) failed to sustain above 91 and fell below the key support levels of 90.70-90.50 mentioned last week. The index has an important support at 90.

A break below 90 will bring back pressure on the index and drag it to 89. It will also confirm the end of the corrective rally and signal the resumption of the overall downtrend.

On the other hand, if the index manages to sustain above 90, it can consolidate in a range of 90-91 or 90-91.50 for some time. The price action near 90 will need a close watch this week.

Euro: Room to rise

The euro (1.2121) managed to hold well above 1.20 and broke above the key resistance level of 1.21 last week. As long as it sustains above 1.21, a further rise to 1.22 is possible this week. It will be important to see if the uro manages to breach 1.22 or not.

A strong rise past 1.22 is very much needed to confirm the resumption of the overall uptrend. Such a break will then pave the way for a further rise to 1.24 and even higher levels. Inability to break above 1.22 can drag the euro lower to 1.21 and 1.20 again. In that case, it can oscillate in the band between 1.20 and 1.22 for some time.

Yields: Resistance ahead

The US 10-Yearr Treasury yield fell sharply after the inflation data was release last Wednesday. The US Core Consumer Price Index (CPI) fell to 1.40 per cent in January from 1.61 per cent in the previous month. However, the Headline CPI rose to 1.37 per cent from 1.30 per cent over the same period.

The 10-year yield fell sharply to a low of 1.12 per cent following the sharp fall in Core CPI. However, the progress to approve the next stimulus continues to keep the sentiment highly risk-averse in the market, taking the yield back up sharply on Friday.

The US 10-year closed the week at 1.21 per cent. It is now poised in its crucial resistance zone of 1.20-1.25 per cent. The chances are high for the yield to reverse lower after testing 1.25 per cent and to fall to 1.10 per cent and 1 per cent in the coming weeks. A strong rise past 1.25 per cent is needed to negate the above mentioned fall.

Dow: Limited upside

The Dow Jones Industrial Average (31,458.40) sustained well above 31,000 last week. The index rose to test 31,500 as expected. However, it seems to lack momentum at the moment to breach 31,500. The view remains the same.

As long as the Dow stays above 31,000, the chances of it testing 32,000 on the upside is still alive. The level 32,000 is a strong resistance that is likely to halt the current upmove. There is a strong likelihood of the Dow reversing lower from 32,000, targeting 31,000-30,000 in the coming weeks.

Rupee strengthens

The Rupee traded above 73 all through the week and strengthened towards 72.70 before closing at 72.75 on Friday. However, the currency extended its rise, breaking sharply above 72.70, in the off-shore market on Friday. It is currently poised at 72.58.

The near-term outlook is bullish; 72.70-72.75 can be a good support. While it stays above 72.75, the rupee can break 72.50 and strengthen further towards 72.30. From a bigger picture, 72.30 is a strong resistance from where a fresh fall is possible.

The writer is a Chief Research Analyst at Kshitij Consultancy Services

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Published on February 13, 2021
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