Technical Analysis

Short-term outlook turns negative for the dollar

Gurumurthy K | | Updated on: Jan 15, 2022
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But strong supports will limit the downside and keep the broader uptrend intact

The prolonged sideways consolidation in the US dollar index and the euro that was in place since the last week of November came to an end in the past week. The dollar index broke its 95.50-97 range on the downside while the euro broke the 1.12-1.14 range on the upside. The breakout came after the US inflation data release on Wednesday. The US Headline Consumer Price Index (CPI) inflation surged to 7.1 per cent (Year-on-Year) in December, the highest since 1982 from 6.9 per cent (Y-o-Y) seen in November.

However, the dollar index had managed to recover in the final trading session of the week on Friday. The index has risen back from the low of 94.63 to close the week at 95.17. The euro on the other hand has come-off from its high of 1.1483 to close at 1.1414 on Friday.

The US Treasury yields have surged in the last two weeks. The yields are looking strong to see a further rise in the coming weeks. This could aid in limiting the downside in the dollar index and push the index back higher going forward.

Dollar Index - Short-term bearish

The US Dollar Index (95.17) broke its 95.50-97 range on the downside and fell sharply last week. This has turned the short-term outlook bearish for the dollar. The index tumbled to a low of 94.63 but had risen back well from there on Friday to close the week at 95.17. If the index manages to sustain above 95 this week, a corrective rise to 95.60-95.80 is possible. However, the outlook will remain bearish as cluster of resistances in the broad 95.60-96 region can cap the upside. A pull-back anywhere from the 95.60-96 resistance zone can drag the dollar index down to 95 again. It will keep the short-term bearish outlook intact. A break below 95 can then drag the index down to 94.50 and even 94.

From a bigger picture, the level of 94 is a strong support. A break below it might not be easy. A strong bounce from 94 can take the index up to 96-97 again. It will also keep the broader uptrend intact for the dollar index to see a break above 97 and a rise to 98 and higher levels over the medium-term.

Treasury yields gain momentum

The rally in the US Treasury yields has gained momentum since the beginning of the year. The US 10Yr Treasury Yield (1.79 per cent) has surged 28 basis points in the first two weeks on the New Year. Support for the yield is now in the 1.68-1.65 per cent region. As long as the 10Yr yield stays above 1.65 per cent, the outlook is bullish. A break above 1.8 per cent can see the yields surging to 2 per cent in the coming weeks. The upside extending even up to 2.1-2.2 per cent cannot be ruled out.

Euro Upside capped

The euro (1.1414) rose last week breaking the 1.12-1.14 sideways range above 1.14. However, as expected the upside was capped. The currency has come-off from the high of 1.1483 on Friday. Strong resistance is at 1.15. Also, the upside could be restricted to 1.16 even if a break above 1.15 is seen.

Immediate support could be at 1.1350. If the euro manages to sustain above 1.1350, it can rise back to 1.1450-1.15 and keep the chances alive seeing an extended rise to 1.16

But as mentioned above, as long as the euro stays below 1.15-1.16 the broader outlook will continue to remain bearish. As such, from a medium-term perspective, we retain the bearish view of seeing a break below 1.12 and a fall to 1.10-1.08 in the coming months.

Rupee Fresh fall ahead

The Indian rupee continued to strengthen against the US dollar for the fourth consecutive week. However, the break above 74 was short-lived and the domestic currency fell-back from the high of 73.77 giving back some of the gains. The currency has closed at 74.15 on Friday. The resistance at 73.80-73.75 has held very well. Immediate resistance will now be at 74. The chances are high for the rupee to trade below 74 this week. Near-term support is at 74.25. A break below it can drag the rupee down to 74.50 in the coming days.

Rupee watch
Near-term support for the Indian rupee is at 74.25. A break below it can drag the rupee down to 74.50 in the coming days.

From a bigger picture, 73.80-73.75 and 73.60-73.50 are strong resistances for the rupee. As long as the domestic currency stays below this resistance, the medium-term outlook is bearish to revisit 75-76 levels again in the coming months and even lower going forward.

Published on January 15, 2022

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