The US dollar extended its fall last week in line with our expectation. The dollar index tested 102 as expected. It made a low of 101.92 and then has risen back well from there. It has closed the week at 103.12, down 0.57 per cent. The trigger for the fall came after the US Federal Reserve meeting on Wednesday. The Fed increased the interest rates by 25 basis points (bps). There were some hopes in the market that the central bank will keep the rates unchanged considering the ongoing banking crisis in the US.
The US economic growth forecast has been revised lower for 2024. The Fed projects the US economy to grow at a rate of 1.2 per cent in 2024. In December last year, the central bank had forecast for a growth of 1.6 per cent. The Fed Chariman Jerome Powell said in his press conference that the actual impact of the ongoing banking crisis on the economy is unclear at the moment. But the revision in the growth projections hints that the central bank might have factored the recent developments in their forecast.
The median projection for the Fed fund rate was left unchanged at 5.1 per cent for 2023. This leaves room for a 25-basis point increase from current levels. Expectation that the rate hike cycle could be nearing an end dragged the US Treasury yields lower. The US 10Yr Treasusry yield (3.38 per cent) fell sharply from a high of 3.64 per cent after the Fed meeting outcome. It made a low of 3.28 per cent and then has bounced from there.
Important support is at 3.19 per cent which can be tested. A strong bounce from there can take the 10Yr yield up to 3.5 per cent again. A break below 3.19 per cent can drag the yield lower to 3.1-3.0 per cent going forward. As such, the price action around 3.19 per cent will need a close watch this week.
The bounce from the low of 101.92 on the dollar index (103.12) has given some breather. If this bounce sustains, a test of 104 is possible this week. Overall, 102-104 looks likely to be a trading range for some time. A breakout on either side of this range will then determine the next move.
The recovery in the dollar index towards the end of the week has dragged the euro (EURUSD: 1.0760) from its high last week. The currency made a high of 1.093 and has come down sharply from there. It has to sustain above 1.07 to avoid a further fall to 1.06 and 1.05 again. It is a wait-and-watch situation.
The Indian rupee (USDINR: 82.48) rose breaking above 82.30 last week. It made a high of 82.08 and then fell back from there to close the week at 82.48 against the dollar in the onshore market. In the offshore segment, the rupee has closed at 82.33.
Key support is at 82.55. This has held well on Friday. Resistance to watch is at 82.00 and 81.90. So, 81.90-82.55 can be the near-term trading range. A breakout on either side of this range will determine the next move.
A break above 81.90 can take rupee up to 81.65-81.50 and even 81.20. On the other hand, a break below 82.55 will see the rupee weakening towards 82.90-83.00 again.