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The outcome of the US Federal Reserve meeting last week has triggered a strong surge in the US Treasury yields. That, in turn, has taken the greenback sharply higher last week. The US dollar index has surged to a 20-year high of 113.23 and closed on a strong note at 113.19, up 3.12 per cent, last week.
Fed impact
The US Federal Reserve increased the rates by 75 basis points (bps) last week, in line with market expectation. The dot plot projection released showed that another 125-bps rate hike is coming from the Fed in its next two meetings in November and December. The doors kept open for more rate hikes for the rest of the year was a surprise. This took the US Treasury yields sharply higher and, in turn, the US dollar strengthened.
Treasury yields: Resistance ahead
The US 10Yr Treasury Yield (3.68 per cent) surged breaking above the key resistance level of 3.5 per cent last week. As expected, that break took the yields higher towards the 3.8-3.85 per cent resistance zone. The yield tested a high of 3.82 per cent and has come off from there. Important resistances are at 3.8 and 3.9 per cent. We expect the US 10Yr yield to remain below 3.8 per cent itself or 3.9 per cent. As such, the chances are high for the yield to see a corrective dip towards 3.55-3.5 per cent in the coming days.
The level of 3.5 per cent is a crucial support which, if broken, can trigger more fall in the yield. The price action around 3.5 per cent will need a close watch.
Dollar index: Limited upside
The US dollar index (113.19) is heading up towards 114 in line with our expectation. As we have been mentioning here, 114 is a strong resistance for the index which has potential to halt the current rally.
A pull-back from 114 can drag the dollar index down to 112-111 initially and even lower, going forward.
Euro: Close to support
As expected, the euro (EURUSD: 0.9687) has declined breaking below 0.9850. The fall to 0.96 that we have been warning here has almost happened. The region between 0.96 and 0.95 is a strong long-term support for the euro.
We expect the current fall to halt in the 0.96-0.95 region and the euro to see a bounce-back to 0.99-1.00 in the coming weeks.
Indian Rupee: Can weaken further
The long-awaited break and fall below 80.20 on the Indian rupee (USDINR: 80.99) finally happened. The trigger for this fall came from the US Fed meeting outcome.
Rupee made a new low of 81.24 against the US dollar and had recovered slightly from there to close at 80.99 in the onshore market. However, the currency has declined again and has closed at 81.25 in the off-shore segment following the strong rise in the dollar index in the US session on Friday.
As long as the current momentum continues, and in the absence of the central bank intervention, the rupee is vulnerable to see 82.50 on the downside in the coming days.
If the central bank intervenes, then there are chances for the rupee to recover and test 80.20-80. We will have to wait and see.
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