Red hot inflation in the US is keeping the doors open for the US Federal Reserve to proceed with their aggressive rate hikes. The US Core Consumer Price Index (CPI) rose 6.3 per cent (year on year) in August from 5.9 per cent in July. However, the US Headline CPI rose at a slower pace of 8.25 per cent (year on year) in August as against the 8.48 per cent rise seen a month ago.
Another 75-basis points (bps) rate hike from the Fed this week on Wednesday is now a given following the strong inflation numbers. Indeed, there are speculations in the market now for even a 100-bps rate hike. We will have to wait to see as what the Fed has on its plate for the markets on Wednesday. More importantly, the central bank will also release its economic projections in this meeting. So, the dot plot will also have to be watched closely to get a cue on future rate hikes.
Yields: The surge continues
The US Treasury yields are retaining their momentum and continue to rise. High prospects for the Fed to retain its aggressive stance on the rate hike is keeping the yields on a strong footing.
The US 10Yr Treasury yield (3.45 per cent) has risen and closed higher for the seventh consecutive week. It is now poised near a crucial resistance level of 3.5 per cent. A strong break above 3.5 per cent will take it further up to 3.6 per cent. It will also keep the doors open for the 10Yr yield to test even 3.8-3.85 per cent on the upside in the coming weeks.
Support is at 3.3-3.25 per cent. The 10Yr Treasury yield will come under pressure only on a break below 3.25 per cent. In that case, a fall to 3.1-3 per cent is possible.
The US dollar index (109.76) fell initially last week. The index broke below the support at 108 and made a low of 107.68. However, it bounced back sharply from this low after the inflation data release and recovered all the loss.
The immediate outlook is mixed. The dollar index has to make a decisive close above 110 to gain momentum. In that case, a rise to 111 is possible. Inability to break above 110 and a fall below 109 can drag it down to 108 again. In that case, the chances of seeing 107 on the downside will remain alive. Overall, 107-111 will be the broad trading range for the dollar index for the next few weeks.
The bigger picture is, however, bullish. A break below 107 will be difficult. As long as the dollar index trades above 107, the rise to 114 will remain intact.
The resistance at 1.02 mentioned last week has held very well as expected. The euro (EURUSD: 1.0016) made a high of 1.0198 and has reversed lower from there.
The short-term sideways range remains intact; 0.9850-1.02 is the trading range for now. The broader bias remains bearish. As such, the euro is more likely to break 0.9850 and fall to 0.98 initially and then to 0.96-0.95 eventually over the medium term.
A higher resistance above 1.02 is available at 1.03. Euro has to break above 1.03 to ease the downside pressure and see a strong corrective rally.
Indian Rupee: Range bound
As expected, the Indian Rupee (USDINR: 79.74) strengthened initially last week. The domestic currency broke above 79.30 and rose to a high of 79.03. However, the sharp recovery in the US dollar dragged the rupee lower again.
The immediate outlook is mixed. Key support to watch will be the 80.10-80.20 region. The rupee has to decline below 80.20 to come under renewed pressure. That will bring the danger of the rupee falling to 81 and 81.50.
On the other hand, if the rupee manages to sustain above 80.20, it can recover towards 79.50 and even higher levels. In that case, a broad range of 79-80.20 will remain in place for some more time.