The US dollar index managed to recover last week after witnessing a sharp fall in the week earlier. A strong surge in the Treasury yields aided the dollar to gain back some strength. Expectations that the US Federal Reserve will increase the rates at a much faster pace than anticipated earlier and begin normalising the size of its balance sheet have triggered a strong rise in the yields.

Against this background, it will be very important to track the US Federal Reserve meeting this week on Wednesday. Will the Fed hint at more acceleration in the pace of hiking the interest rates and on the reduction of the balance sheet? We will have to wait and watch.

The dollar and the yields could give back more of the gains if the Fed decides to stay on hold with its earlier stance and fails to provide any fresh hawkish hint on the rate hike and balance sheet reduction front.

Post the Fed meeting outcome on Wednesday, the central bank’s much watched inflation gauge, Personal Consumption Expenditure (PCE) release on Friday will be an important data to look out for.

Dollar index: Resistance ahead

The US Dollar Index (95.65) sustained well above 95 and rose to test 95.80 as expected. It made a high of 95.86 and has come off slightly from there. Immediate resistance is at 96. A cluster of resistances are poised in between 96.30 and 96.50 and the crucial resistance to watch will be at 97. The index will need a strong trigger to rise past all these hurdles from here. Will the Fed meeting outcome on Wednesday provide that trigger to push the dollar index sharply higher? We will have to wait and watch.

Inability to rise past 96 or 96.50 from here can keep the dollar index lower and drag it to test 95-94.50 again. However, from a long-term perspective, we reiterate that 94 is a strong support that can limit the downside. As long as the index trades above 94, the broader picture is bullish to break 97 and see a rise to 98 initially and further higher levels eventually in the coming months.

Treasury yields: Limited downside

The US 10Yr Treasury Yield (1.76 per cent) rose, breaking above 1.8 per cent last week as expected. However, the rally did not sustain. The yield surged to a high of 1.86 per cent and has come off sharply. A further dip to 1.7-1.65 per cent is likely in the first half of the coming week ahead of the US Fed meeting on Wednesday.

On the charts, 1.65-1.6 per cent is a strong support zone. As long as the yield manages to sustain above 1.6 per cent, the broader outlook is bullish to see a rise to 2 per cent initially and even 2.1-2.2 per cent eventually in the coming months.

Only a strong break below 1.6 per cent will negate the above-mentioned bullish view. In that case, the US 10Yr Treasury yield can fall to 1.4 per cent. Whether the yield sustains above 1.6 per cent or breaks below it will largely depend on the outcome of the Fed meeting on Wednesday.

Euro: Support ahead

The euro (1.1340) failed to sustain higher and fell, breaking below 1.14 to test 1.13 last week. However, the pace of the fall in the second half of the week has slowed down and the currency has managed to trade stable above 1.13.

Strong support is at 1.13-1.1270. If the euro manages to sustain above 1.1270, a rise back to 1.14-1.1450 is still possible again.

On the downside, 1.12 will be the crucial support to watch below 1.1270. A strong break below 1.12 is needed to bring fresh selling pressure on the currency and drag it down to 1.10 and lower levels over the medium term.

From a bigger picture, 1.12-1.15 is the broad range of trade. The bias is still negative to see a break below 1.12 and a fall to 1.10 or lower in the coming months.

Rupee can weaken further

The Indian rupee (74.42) fell, breaking below the support at 74.25 last week in line with our expectation. The domestic currency declined sharply in the first half of the week and made a low of 74.70 on Wednesday. Thereafter it had managed to recover slightly and close the week at 74.42, down 0.36 per cent against the US dollar.

The broader picture remains weak. Strong resistance for the week will be at 74.25-74.20 which is likely to cap the upside. As long as the rupee trades below 74.20, the outlook will remain bearish to see a fresh fall to 74.80-74.90 in the coming weeks.

In case the rupee manages to break above 74.20, it can strengthen towards 74.10-74 and then reverse lower again. In that case, the fall to 74.80-74.90 mentioned above will get delayed.

Rupee watch
As long as the rupee trades below 74.20, the outlook will remain bearish to see a fresh fall to 74.80-74.90 in the coming weeks.
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