Technical Analysis

Global 360: Will dollar index break out of range?

Gurumurthy K |BL Research Bureau | Updated on: Mar 26, 2022

US Treasury yields surge sharply across tenors

The US dollar index is consolidating within its overall uptrend. The index has been oscillating within the 97.70-99.45 range over the last three weeks. That has kept the euro stable around 1.10 last week.

The major action was seen in the bond market last week. US Treasury yields had surged sharply across tenors. The US 10Yr Treasury yield (2.47 per cent) broke above the key level of 2.2 per cent and rose sharply by 32 basis points (bps) last week. The US Federal Reserve Chairman Jerome Powell’s speech indicating the possibility of more aggressive rate hikes if needed triggered the rise in Treasury yields. The Fed chairman said that inflation is too high and if needed the central bank can increase the rates more than the usual 25 bps in its monetary policy meetings. “If we conclude that it is appropriate to move more aggressively by raising the federal funds rate by more than 25 basis points at a meeting or meetings, we will do so’, said Jerome Powell in his speech in a conference last week.

Several major data releases are due this week. The US Consumer Confidence data is due on Tuesday. That will be followed by the Personal Consumption Expenditure (PCE) data, the US Federal Reserve’s inflation gauge on Thursday. A strong PCE number will reinforce the case for the Fed to look for more aggressive rate hikes this year than forecast earlier. That, in turn, can take the Treasury yields further higher in the coming weeks. As of the March projection, the Fed will hike rates by 25 bps points in all its six upcoming meetings this year.

Treasury yields: Bullish

The US 10Yr Treasury yield (2.47 per cent) has risen sharply, breaking above the key 2.2-2.3 per cent resistance zone. Any dips from current levels will find strong support in the 2.3-2.2 region now. A fall below 2.2 looks less likely now. As such the 10Yr Treasury yield is likely to sustain above the 2.3-2.2 per cent support zone, going forward. The outlook will continue to remain bullish. There is room for the yield to move further up towards 2.6-2.65 per cent in the coming weeks. The 2.6-2.65 per cent zone is a strong resistance. We can expect the current rally to halt there, and a reversal is possible eventually.

Dollar Index and Euro: Range-bound

The US Dollar Index (98.80) is retaining its 97.7-99.45 range. The price action on the daily chart indicates lack of strength. As such, an upside break above 99.45 looks less probable immediately in the absence any new trigger. This leaves the chances high of the Dollar Index coming down towards 98-97.70 this week.

Overall, we need to wait for the dollar index to break 97.7-99.45 on either side to give clarity on the next direction of move. A break below 97.70 will turn the short-term outlook negative. Such a break can take the dollar index down to 97 and 96.5. On the other hand, a strong break above 99.45 will see the overall upmove resuming towards 100-101in the coming weeks.

The euro (EURUSD: 1.0979) oscillated around 1.10 most part of last week. The price action on the daily chart indicates that the currency is getting support above 1.0950. A break above 1.1050 can take the euro up to 1.1150 this week. As mentioned last week, 1.09-1.1150 (narrow) or 1.08-1.12 (broad) are the possible range of trade for now. A breakout on either side of 1.08-1.12 will then determine the next move. A break above 1.12, can take the euro up to 1.13 and even 1.15. On the other hand, a decisive break below 1.08 will bring renewed pressure on the currency. Such a break can drag the euro down to 1.06-1.04.

Rupee: Mixed

The Indian Rupee (USDINR: 76.20) remained stable in the range of 75.98-76.48 last week. The immediate outlook is unclear. Support is at 76.50 and resistance is at 76 and 75.75. Broadly, the rupee can trade in the range of 75.75-76.50 for some time. A breakout on either side of 75.75-76.50 will then decide the next leg of move. A break above 75.75 can take the rupee up to 75.50 – the next important resistance. A decisive break above 75.50 is necessarily needed for the rupee to gain bullish momentum and strengthen towards 75 and 74.50.

On the other hand, a break below 76.50 will be bearish. It will indicate the resumption of the overall downtrend. In that case the rupee can weaken to 77-77.25.

Rupee watch
5.75-76.50 can be the possible range of trade in the near term

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Published on March 26, 2022
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