Global 360: Will supports limit the downside in US dollar?

Gurumurthy K |BL Research Bureau | Updated on: Jul 24, 2022

The Fed meeting outcome, US GDP data release can keep the market volatile this week

The fall to 106 on the dollar index has happened in line with our expectation. The US dollar index touched a low of 106.11 and has closed the week at 106.73, down 1.23 per cent. The euro, on the other hand, has risen. The corrective rally to 1.03-1.0350 mentioned last week is happening now. The currency rose to a high of 1.0278 and has closed at 1.0213, up 1.32 per cent for the week.

The European Central Bank (ECB) surprised the market with a 50-basis point (bps) rate hike on Thursday. Though the euro rose after this outcome, it failed to break above 1.0250.

Eventful week

Following the ECB, all eyes will now be on the US Federal Reserve. The Fed’s policy meeting outcome is due on Wednesday. Market expects the Fed to increase rates by 75 or even 100 bps this week.

Following the Fed meeting, the US GDP data (advance estimates) release is on Thursday. This data release will give a hint on whether the US is heading into a recession or not.

Finally on Friday, the US Personal Consumption Expenditure (PCE) — the Fed’s inflation gauge — data is due for release. All these guarantees a volatile week in the global market.

Dollar Index: Close to support

The support at 106 on the dollar index (106.73) has held well. As mentioned last week, the downside can be limited up to 105 even if the dollar index declines below 106. We can expect the index to reverse higher either from here itself or after an extended fall to 105. For now, 106-109 (narrow) or 105-110 (broad) can be the possible range of trade for some time.

The long-term picture remains bullish. An eventual break above 110 can take the dollar index up to 114 over the medium term.

Euro: Resistance ahead

The strong rise seen in the first half of the week seems to have lost momentum. The euro (1.0213) is facing strong resistance at 1.0250. It has to see a sustained rise past this hurdle to move up further from here. A strong break above 1.0250 will take the euro up to 1.0450 in the coming weeks. This rise can happen if the dollar index breaks below 106 and falls to 105.

Support is at 1.01. A break below it will bring the currency under pressure and drag it below parity again.

The bigger picture is negative. Any rise from here could be capped at 1.0450 or 1.05. A fresh leg of fall will have the potential to take the euro down towards 0.96-0.95 in the coming months.

Treasury yields: At a crucial juncture

The US Treasury yields were volatile last week. The US 10Yr Treasury yield rose above 3 per cent, but failed to sustain. It fell back sharply after making a high of 3.08 per cent and has closed on a weak note at 2.75 per cent.

A crucial support is at 2.7 per cent. If the yield declines below this support, it can see a steeper fall to 2.6-2.55 per cent in the coming week. Thereafter, a bounce is possible.

The price action around 2.7 per cent will need a close watch. The outcome of the Fed meeting on Wednesday could decide whether the yield can sustain above this crucial support or not.

Rupee watch
79.65-80.05 is the range of trade. Rupee can strengthen to 79.50-79.30 if it manages to break above 79.65

Rupee: Mixed and stable

The Indian Rupee (USDINR: 79.85) remained broadly stable in the past week. Though it fell below 80 and made a new low of 80.06, the currency recovered towards the end of the week and closed on a flat note.

The price action last week indicates that the currency is getting support to avoid a steeper fall below the psychological level of 80. The current range of trade is 79.65-80.06. If the rupee manages to break above 79.65, a recovery to 79.50 and 79.30 can be seen in the near term.

On the other hand, if the rupee continues to trade below 79.65 and breaks below 80.06, a further fall to 80.35 and 80.50 can be seen. We reiterate that 80.50 is a strong resistance that can limit the weakness in the rupee for some time.

Published on July 23, 2022
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