After remaining stable around 102.5 for almost all through the week, the US dollar index witnessed a sharp rise on Friday. The US inflation data release on Friday triggered the rise in the greenback. The US Consumer Price Index (CPI) rose 8.6 per cent (year-on-year) in May. Strong inflation numbers keep the hopes high in the market for the US Federal Reserve to continue with its aggressive rate hikes.

The strong rise in the US dollar has dragged the euro sharply lower last week. The Indian rupee has weakened sharply in the off-shore segment after the US inflation data release on Friday. The domestic currency has declined and closed below the key level of 78 in the off-shore market.

The Fed meeting outcome is due this Wednesday. A 50-basis points (bps) hike has already been priced in the market. Any hint for more rounds of 50-bps rate hikes in the future would be very positive for the dollar.

Dollar Index: Bullish

The US dollar index (104.15) has risen sharply last week breaking above the key resistance level of 103. This keeps the broader bullish view intact. The rally last week also indicates the resumption of the overall uptrend. Support will now be at 103. Below that, 102 is the next strong support. The dollar index has to fall below 102 to come under pressure. But that looks less likely at the momentum.

As long as the index sustains above 103, the outlook is bullish to see 105 and 106 in the coming weeks.

From the bigger picture perspective, the dollar index seems to have potential to target 110 on the upside.

Euro: Bearish

As expected, the euro (EURUSD: 1.0515) has declined sharply breaking below 1.06 last week. This keeps the overall bearish view intact. The currency can face resistance now in the 1.06-1.0650 region. A fall to 1.04 is on the cards for this week.

From a medium-term perspective, inability to breach 1.08 keeps the broader downtrend intact. As such the euro can come under more pressure on a decisive break below 1.04. Such a break can drag it to 1.02 and even 1.00 in the coming months.

The European Central Bank (ECB) in its meeting last week confirmed a 50-bps rate hike in its next meeting in July. That has failed to help the euro to stay afloat.

Rupee watch
Rupee can open with a gap-down below 78 and weaken towards 78.30-78.50
Treasury Yields: Can rise further

The US Treasury yields continued to move up last week as expected. The US 10Yr Treasury Yield (3.16 per cent) has surged breaking above the psychological level of 3 per cent last week in line with our expectation. The yield has come closer to 3.2 per cent. A break above 3.2 per cent will see the 10Yr yield surging towards 3.4 per cent in the coming weeks.

The outcome of the US Federal Reserve meeting on Wednesday will be crucial. That would be key in deciding whether the yield can rise past 3.2 per cent or not.

Rupee: Can weaken

The Indian rupee (USDINR: 77.84) inched lower at a very slow pace all through the week. The currency has broken the 77.40-77.80 range on the downside as expected and has closed at 77.84 in the onshore market. However, in the off-shore segment, the currency fell sharply breaking below 78 after the US inflation data release on Friday. It has closed at 78.10 in the off-shore market.

This indicates that the rupee can open with a gap-down below 78 on Monday. The domestic currency can weaken towards 78.30-78.50 in the near term. The price action around 78.50 will need a close watch. Inability to recover from 78.50 will be very bearish to see 79-80 levels, going forward.

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