The US dollar continues to trade strong. The dollar index surged breaking above the resistance at 108 last week. It made a high of 109.21. Strong inflation numbers last week aided the rise in the dollar index. The US Headline Consumer Price Index (CPI) inflation rose 9 per cent (year-on-year) in June from 8.52 per cent a month ago. This increased the speculation in the market that the US Federal Reserve could go more aggressive and increase the policy rates by 100 basis points in its meeting this month. The strength in the greenback dragged the euro to parity against the US dollar.

For the coming week, the US housing starts on Tuesday and the existing home sales number on Wednesday are important data release to watch.

Dollar Index: Resistance ahead

The US dollar index (108.06) extended the rally last week breaking above the resistance at 108. It surged to a high of 109.29 and has come off from there. An important resistance is in the 109.50-110 region. The chances are high for the upside to be capped at 110 for now. As such, we can expect a pull-back towards 107 and even 106 in the coming weeks.

However, the bigger picture will continue to remain bullish. The expected corrective fall could be limited to 106 or a maximum of 105. Thereafter a fresh rally can begin. From a long-term perspective, the dollar index has potential to target 114 on the upside in the coming months. A decisive break above 110 will pave way for that.

Euro: Relief rally possible

The euro (EURUSD: 1.0087) touched parity against the US dollar for the first time since 2002. The currency tumbled to a low of 0.9950 and then had risen back sharply to close the week at 1.0087, down 0.94 per cent for the week.

The expected test of 0.9950 and a bounce thereafter mentioned last week is happening in line with our expectation. This indicates that the euro could have found an intermediate bottom. The price action in the coming weeks will need a close watch.

Important resistance to watch is at 1.0150. A break above it can trigger a corrective rally towards 1.0300-1.0350 or even higher in the coming weeks.

However, the broader trend will continue to remain down. We can expect the euro to reverse lower again from anywhere above 1.0350. From a long-term perspective, the fall in the euro has potential to target 0.96-0.95 on the downside in the coming months.

The European Central Bank (ECB) meeting is on Thursday. The outcome of this meeting will need a close watch.

Rupee watch
Outlook is weak to see a fall to 80.35-80.50 after which the rupee can see some recovery
Treasury yields: Lacks strength

The US 10Yr Treasury yield (2.91 per cent) failed to extend the rise and has declined below 3 per cent again, contrary to our expectation. We had expected a rise to 3.2 per cent last week. The 10Yr made a high of 3.09 per cent and fell to close the week at 2.91 per cent. As long as the yield remains below 3 per cent, the outlook is weak. A further fall to 2.75 per cent looks likely this week.

The level of 2.75 per cent is a very important support. A break below it can increase the downside pressure and drag the 10Yr yield down to 2.6 per cent. The price action around 2.75 per cent will need a close watch.

Rupee: Weak

The Indian Rupee (USDINR: 79.88) made a new low of 79.95 and had recovered slightly from there. However, in the offshore segment, the currency fell below the psychological 80-mark and tumbled to a low of 80.21 on Thursday. It has recovered from there to close at 79.76 in the offshore market.

Strong resistance is in the 79.60-79.50 region which can cap the upside in the rupee. The view remains bearish, the rupee can break below 80 and fall to 80.35 and 80.50 in the coming days. As mentioned last week, 80.50 is a strong support which can halt the current fall on its first test. We can expect the rupee to recover and see a corrective rally from the 80.35-80.50 region towards 78.50 in the coming weeks.

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