The US Dollar continues to trade strong. The dollar index tested 101 and then saw a sharp correction in the first half of the week. However, the US Federal Reserve Chairman Jerome Powell’s comment on rate hikes triggered a sharp reversal. That took the index back higher and it closed above 101. Powell, last week in his speech, indicated the possibility of a 50-basis points (bps) rate hike in its meeting next month. It also saw the US Treasury yields surging back higher from their intra-week lows. An aggressive rate hike path from the Fed can continue to support the dollar and the yields higher.

For the coming week, the US Personal Consumption Expenditure (PCE) – the Fed’s gauge for inflation – is due for release on Friday. A strong PCE number will strengthen the case for a 50-bps rate hike next month.

Dollar index: Bullish

The US Dollar Index (101.22) witnessed a corrective fall after testing 101 initially last week. But that was in line with our expected and the downside was limited to the 100-99.5 region as was mentioned last week. The index made a low of 99.82 and has risen back sharply above 101. This keeps the overall bullish view intact. It looks like the index can target 102.5 much faster that we had expected earlier.

We reiterate that 102.5 is a very crucial resistance that can halt the current rally. As mentioned last week, a pull-back from 102.5 and a subsequent fall below 100 can turn the outlook bearish for the dollar index. A decisive break above 102.50 and then a strong follow-through rally above 104 will be very bullish. As such the price action after the dollar index reaches 102.50 will need a very close watch.

Euro: Bearish

The euro (EURUSD: 1.0777) surged to a high of 1.0936 in the first half of the week. One of the European Central Bank (ECB) members hinting for a rate hike in July took the currency higher. However, the euro lost momentum as the dollar strengthened after the possible US Fed rate hike in May. The euro has declined sharply from 1.0936 and breaking below 1.08.

Inability to sustain the break above 1.09 and the weekly close below 1.08 keeps the broader bearish view intact. Immediate support is at 1.0750. Resistance is at 1.0815 and then at 1.09. A break below 1.0750 will drag the euro down to 1.06 and even 1.04 in the coming weeks.

Treasury yields: Can break the resistance

The US 10-Yr Treasury Yield (2.90 per cent) has risen and is now poised inside the 2.9-3 per cent resistance zone. Prospects for a more aggressive rate hikes from the Fed are keeping the yields higher. Considering the current momentum, the chances are looking high for the US 10-Yr yield to breach 3 per cent from here without seeing a corrective fall. Such a break will then open doors for a further rise towards 3.2 and even 3.4 per cent in the coming weeks. In case the 10-Yr reverses from 3 per cent just now, a corrective dip to 2.8 per cent is possible before a fresh leg of upmove begins.

Rupee watch
The chances are high for the rupee to break 76.55 and fall to 76.80 and 77 in the near term

Rupee: Vulnerable to weaken

The Indian rupee (USDINR: 76.48) broadly oscillated between 76 and 76.50 last week. However, the weekly candle indicates that the rupee could be vulnerable to weaken going forward.

This leaves the chances of the rupee breaking below the immediate support level of 76.55 high. Such a break can drag it to 76.80 and even 77 in the next one-two weeks.

Strong resistance is in the 76.10-76.00 region. The rupee will have to breach 76 decisively to ease the downside pressure and strengthen towards 75.75 and 75.50. But a break above 76 is less likely, considering the overall strength in the dollar index. As such, the preferred path of move for the rupee will be to see 77 levels on the downside, going forward.

Published on April 23, 2022