Dollar to retain strength in 2022

2021 was a good year for the US dollar. After tumbling about 6.7 per cent in the election year 2020, the US dollar index has made a strong recovery in 2021, the first Presidential year under Joe Biden. The index has surged 6.37 per cent in 2021 and has closed on a strong note at 95.67 for the year.

The US Federal Reserve firstly beginning the stimulus taper and also increasing its pace to wind it down sooner than expected and, secondly, hinting at three rate hikes in 2022 itself have been significant developments that were not anticipated at the beginning of the year. Against this background, can the greenback hold on to its gains and move further higher from here in the new year 2022? We take the cue from what the charts say.

Outlook for 2022

Dollar Index: The strong rise in the dollar index (95.67) last year had happened after a strong base formation around 90. Immediate support for the index is at 94 and then a slightly deeper support is at 92. As long as the index stays above these supports, the outlook will remain bullish. We see high chances of the index sustaining above 94 itself in the coming months. Immediate resistance is at 96.50. A break above it can take the index up to 98 in the short term. The level of 98 is a strong resistance that can hold on its first test at least. A pull-back from there can take the index down to 96 and even 94. As such, the dollar index can remain range-bound between 94 and 98 at least in the first quarter of 2022.

As mentioned above, the bias is bullish. As such we can expect the index to break 98 eventually and then rise to 100 initially. Thereafter, a corrective fall to 98-97 cannot be ruled out. However, the trend will continue to remain up. An eventual break above 100 will see 101.50-102.50 by the end of first half or in early third quarter.

The index is likely to find a top anywhere in the 101.50-102.50 region and can fall below 100 again towards 98-96 as we proceed into 2023.

Euro: The euro (1.1370) has been in a strong downtrend since May 2021. Within this downtrend the currency has been consolidating between 1.12 and 1.14 since mid-November. The trend is down. The upside is likely to be capped at 1.1450-1.15 even if a break above 1.14 is seen. As such the euro is likely to break below 1.12 and fall to 1.10 and even 1.08 as we progress into 2022. The level of 1.08 is a strong long-term support and a break below it could be difficult. It will have to be seen if the euro can stage a strong rally from 1.08 to 1.16 and higher or will get stuck in a narrow range of 1.08-1.12.

Rupee: The strong recovery from the low of 76.31 in December has erased most of the loss for the Indian rupee for the year. Broadly, 72.20-76.30 has been the overall range for the rupee since May 2020. Within this broad range, the currency is facing resistance at 74-73.80 in last three months.

The broader 72.20-76.30 range remains intact. But a rounding pattern on the chart leaves the bias bearish to see a break below 76.30 eventually in 2022, which can take it to a new low. The rounding pattern also leaves the chances high for the rupee to stay below 73.50 in the coming months.

As such, 73.50-76.30 can be the range of trade for next two-three months. Thereafter the Indian rupee is likely to break 76.30 and fall to 78 in the second quarter of 2022. Can the rupee break below 78? That will have to be seen. If so, a much steeper fall to 79.50 will be possible.

In case the rupee breaks above 73.50 from here, it can move down to 72.20 — the lower end of the range. In that case the break above 76.30 will get delayed. But considering the rounding pattern on the chart, the chances of break above 73.50 look less likely. Also, the rupee will have to break above 72 decisively in order to negate the fall to 78 and turn the overall trend up against the US dollar.

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