Technical Analysis

Global 360: What will the US dollar do this week

Gurumurthy K |BL Research Bureau | Updated on: May 21, 2022

Crucial support at 102.50-102.30 must hold to avoid a steeper fall

The US dollar index fell sharply last week. The index has closed in red after having risen continuously over the last six weeks. It has closed the week at 103.03, down 1.47 per cent. A sharp fall in the US Treasury yields dragged the greenback lower last week.

However, the downward reversal in the dollar index does not throw any threat for the current uptrend. At the moment it just looks like a corrective fall within the overall uptrend.

The US Federal Reserve Chairman, Jerome Powell, last week said that the central bank will continue to increase rates until the inflation comes down. This reiterates the hawkish stance of the Fed. It also strengthens the case for the possibility of another 50-basis point rate hike coming from the Fed next month.

The US Personal Consumption Expenditure (PCE), the Fed’s gauge for inflation, data is due for release on Friday. A strong PCE number will increase the speculation in the market for a more aggressive rate hike from the Fed. In turn, that can help the dollar index to move higher going forward.

Dollar index: Crucial support ahead

The US Dollar index (103.03) has a crucial support at 102.50-102.30. The index has to sustain above this support zone to avoid a much steeper fall.  A bounce from the 102.50-102.30 support zone can take the index up to 104-105 again. It will also keep the broader uptrend intact to see 106 on the upside eventually in the coming weeks.

On the other hand, if the dollar index breaks below 102.3, it can come under pressure. A subsequent fall below 102 will increase the downside pressure and drag it down to 102-101, going forward. As such, the price action in the 102.50-102.30 region will need a very close watch this week.

Euro: Resistance ahead

The euro (EURUSD: 1.0560) has risen sharply above 1.05 last week contrary to our expectation. Immediate and important resistance is at 1.06. Whether the euro manages to rise past this hurdle or not will determine the next move.

A strong break above 1.06 will give some breather for the currency. It will increase the chances of seeing a further rise towards 1.07 and even 1.08 in the coming weeks. However, the broader trend will continue to remain down. The euro will have to surpass 1.08 decisively to confirm that a bottom has been formed and signal trend reversal. But that might not be very easy, and it will need some strong trigger.

If the euro fails to breach 1.06 from here, it can fall back to 1.05-1.04. In that case, 1.0350-1.06 can be a trading range for some time. It will keep the broader bearish view intact to see a break below 1.0350 and a fresh fall to 1.02 and even 1.00.

Treasury yields: At a support

The US 10Yr Treasury yield (2.8 per cent) remained below 3 per cent and has come down further last week in line with our expectation. It is now poised at a key support level. A break below 2.8 per cent can drag it further down to 2.7 per cent and even 2.6 per cent in the coming days. The level of 2.6 per cent is an important support. The chances of the 10Yr Treasury yield reversing higher again from around 2.6 per cent cannot be ruled out.  

Rupee watch
77.30-77.80 or 77-78 can be the trading range. Bias will remain negative to break and fall below 78 eventually

Rupee: Ranged

As expected, the Indian Rupee (USDINR: 77.55) broke below 77.60 and fell to a low of 77.78 last week. However, the domestic currency has managed to recover from this low and close the week at 77.55 in the spot market. In the off-shore market, the rupee has closed on a slightly weaker note at 77.80.

Strong resistances are at 77.50 and 77.30. A break above 77.30 will be needed for the rupee to strengthen towards 77. The overall view remains bearish and broadly the rupee is likely to trade below 77.

Supports are at 77.80 and 78. A break below 78 can drag the rupee lower to 78.30 and 78.50 in the coming days.

Broadly, 77.30-77.80 (narrow) or 77-78 (broad) can be the trading range for the rupee for some time. Within the range, the bias is negative to see a break and fall below 78 going forward.

Published on May 21, 2022
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