The inflation in the US showing signs of cooling down has increased the pressure on the US Treasury yields and the dollar index. The US Headline Consumer Price Index (CPI) inflation rose 6.4 per cent in December. This is much slower than the rise of 7.12 per cent seen in the previous month. Broadly the US Headline CPI has been cooling down from a peak made around 9 per cent last year. The inflation cooling down has increased the hopes in the market that the US Federal Reserve will slow down the pace of the rate hikes. That, in turn, is weighing on the Treasury yield and the dollar index.
The US 10Yr Treasury yield fell sharply to test a low of 3.41 per cent. However, it has managed to bounce back from the low to close the week at 3.5 per cent. The fall in the Treasury yields has dragged the dollar index to a low of 101.99 before closing the week at 102.20.
The dollar index is at a crucial 102-101.80 support zone. The index has to bounce back immediately and rise above 103 to ease the downside pressure. In that case, the index can rise to 104-105 in the near term. A sustained rise above 105 will turn the outlook bullish and negate the danger of any further fall.
On the other hand, if the dollar index breaks below 101.8, it can test 101 initially. A further break below 101 can drag it further down to 100 and lower levels thereafter.
The uptrend in the euro (EURUSD: 1.0830) is intact. But there is limited room left for the currency to rise from here. Immediate resistance is at 1.0890. Above that, 1.10-1.11 are the next strong resistances.
If the euro manages to breach 1.0890, it can see an extended rise to 1.10-1.11 in the near term. A rise beyond 1.11 might not be easy for the currency immediately. We expect the upside to be capped at 1.10-1.11 for now. As such, the euro can see a corrective fall from 1.10-1.11 targeting 1.07-1.05 on the downside.
The US 10Yr Treasury (3.50 per cent) yield fell to a low of 3.41 per cent and has managed to bounce back from there. Crucial support to watch will be the 3.45-3.40 per cent zone. A decisive break below 3.4 per cent will be bearish. Such a break can take the 10Yr Treasury yield down to 3.3-3.25 initially. It will also keep the yield under pressure to fall below 3.2 per and test even 3.1-3 per cent on the downside.
Resistance is at 3.65-3.7 per cent. A strong break above 3.7 per cent will now be needed to ease the downside pressure and move up to 3.9-4 per cent again. Overall, it is a wait-and-watch situation now.
The Indian Rupee (USDINR: 81.33) has been strengthening well against the greenback over the last couple of weeks. However, this upmove has come closer to a key hurdle. Strong resistance for the rupee is at 81.00-80.90. The domestic currency has to see a sustained break above 80.90 to strengthen further towards 80.50-80.30. Failure to breach 80.90 will see the rupee weakening back to 81.60 and 81.90 in the near-term. As such, the price action in the 81.00-80.90 region will need a close watch this week.
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