Technical Analysis

Dollar’s recovery loses steam

Gurumurthy K | Updated on January 23, 2021

A fall below 90 in the Dollar Index will indicate the resumption of downtrend

The corrective rally in the US Dollar Index from the early January low of 89.21 seems to have hit a hurdle and started weakening. The index has come off from the high of 90.95 and is hovering above a key support.

The bounce in the euro from the low of 1.2053 last week has dragged the Dollar Index lower. The price action in the coming week will need a close watch as the dollar and the euro hover near their crucial support and resistance, respectively. The US Federal Reserve meeting due this week will need a close watch to see how it can impact the dollar movement.

US Fed meeting

The US Federal Reserve’s monetary policy meeting outcome is due on Wednesday. The Fed is widely expected to keep the interest rates and Quantitative Easing (QE) programme unchanged. However, its outlook on the economy following the vaccine roll-out and any hint on more stimulus will have to be watched.

Apart from the Fed meeting, the Consumer Confidence and the fourth-quarter GDP data are the other important data releases due from the US this week that can impact the movements of the US dollar and the Dow Jones Industrial Average.

Dollar: Stuck in a range

As expected, the US Dollar Index (90.21) tested 91 last week but did not extend the rise beyond 91.50. The index has been stuck in the 90-91 band over the past two weeks. As such, 90 will be an important support to watch now. A break below 90 will negate the chances of seeing 91.50-92 on the upside mentioned last week. Such a break will take it to 89-88, thereby indicating the resumption of the downtrend.

On the other hand, if the Dollar Index manages to sustain above 90, it can bounce back to 91 again and continue to consolidate between 90 and 91. Overall, the broader view is still bearish on the dollar index with the upside being capped at 91-92.

Dow lacks momentum

The Dow Jones Industrial Average (30,996.98) rose back above 31,000 but came off from the high of 31,272.22. The index continues to lack momentum to sustain and see a strong follow-through rise above 31,000. The immediate outlook is mixed. However, from a bigger perspective, there is limited room on the upside from here up to 31,500 or 32,000, and not beyond that. On the downside, 30,300-30,000 will be a crucial support zone to watch. A strong break below 30,000 will confirm that a top is in place and trigger a sharp corrective fall to 29,000 or even lower.

ECB: A non-event

The European Central Bank (ECB) left the policy rates and the stimulus package unchanged and the meeting turned out to be a non-event last week. Earlier in December, the ECB had increased the Pandemic Emergency Purchase Programme (PEPP) stimulus package by €500 billion to €1,850 billion and had also extended its tenor to March-2022 from June 2021.

However, the central bank had reiterated that it will be ready to use all the possible tools in order to attain the inflation target in a sustained manner. The ECB’s outcome did not have much impact on the euro. The currency inched slightly higher after the policy outcome and continued to trade stable.

The euro

The fall to 1.20-1.1950 mentioned last week did not happen. Instead, the euro (1.2171) bounced back well after making a low of 1.2053 on Monday. However, 1.22 will be an important immediate resistance to watch this week.

A strong break above 1.22 will negate the chances of seeing 1.20-1.1950 on the downside mentioned last week. Such a break will bring back the bullish momentum and can take the euro higher to 1.24-1.25 in the coming weeks. So, the price action around 1.22 on the euro will need a close watch this week.

Rupee recovers

The rupee fell to a low of 73.30 initially last week but managed to recover well from there. The currency closed the week at 72.98. An important resistance is at 72.90. A break above this will see the rupee strengthening towards 72.70-72.65 this week.

On the other hand, failure to breach 72.90 can keep the rupee in a narrow range of 72.90-73.15 or 72.90-73.25 for some more time. On the charts, the chances are high for the rupee to break 72.90 and rise to 72.70-72.65, if not immediately, but eventually.

The writer is a Chief Research Analyst at Kshitij Consultancy Services

Published on January 23, 2021

Follow us on Telegram, Facebook, Twitter, Instagram, YouTube and Linkedin. You can also download our Android App or IOS App.

This article is closed for comments.
Please Email the Editor