The dollar index continued to fall initially last week. The index fell about a per cent intra-week and made a low of 103.45. However, the outcome of the US Federal Reserve meeting on Wednesday has given some breather for the green-back. The dollar index has risen back from that low, recovering some of the loss. It has closed the week at 104.70, down 0.1 per cent.

Hawkish central banks

The outcome of the US Fed and the European Central Bank (ECB) meeting last week indicates that the global central banks are still hawkish.

US Fed increased the rates by 50 basis points (bps) as expected. However, the central bank has projected the median Fed fund rate to be at 5.1 per cent in 2023. That would be a cumulative 75-bp rate hike next year. The Fed fund rate is currently at 4.25-4.5 per cent.

The ECB also increased the rates by 50 bps last week and had hinted for more rate hikes to come. In addition to this, the central bank also announced its plan for balance sheet reduction. Accordingly, the ECB will reduce the asset purchase from March 2023 by €15 billion per month.

Still weak

Although the dollar index (104.70) has bounced from the low of 103.45, the broader trend is still down. There could be room for a further rise to 106 in the near term. However, the index has to breach 106 decisively to strengthen the bullish case for a rise to 108 and higher levels.

Failure to break above 106 and a reversal thereafter will keep the overall downtrend intact. In that case, the doors will still remain open for the dollar index to test 102.50-102 on the downside.

Supports ahead

The euro (1.0586) has come off from the high of 1.0735. There is room for it to fall further towards 1.05-1.0470 — an important support zone. Thereafter, we expect the euro to bounce back to 1.06-1.07 levels.

Only a decisive break below 1.0470 will bring the euro under pressure. In that case, a steeper fall to 1.04 and even 1.03 can be seen.

Range bound

The US 10Yr Treasury yield (3.48 per cent) has been oscillating in a sideways range now. The range of trade has been 3.4-3.63 per cent over the last two weeks. There is still room on the downside to test 3.35-3.33 per cent.  Crucial resistance is at 3.63-3.65 per cent. A strong break above 3.65 per cent is needed to indicate a reversal. Such a break can take the yield up to 3.8-3.85 per cent.

From a big picture perspective, a reversal from the 3.35-3.33 per cent support zone and a subsequent rise past 3.65 per cent can have the potential to take the 10Yr back up to 4 per cent and even higher levels. That is something very important to watch.

Rupee watch
A strong break above 82.40 is needed for the rupee to get a breather and strengthen to 82-81.90
Weakness intact

The Indian Rupee (USDINR: 82.87) has weakened further. The level of 82.40 has been capping the upside for now. The broader picture remains bearish. A fall to 83 and 83.50 is likely as long as the rupee remains below 82.40.

The rupee will get a breather only if it breaches 82.40. In that case, it can strengthen towards 82 and 81.90

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