Technical Analysis

Is Dollar Index heading for a corrective dip?

Gurumurthy K | | Updated on: Dec 04, 2021
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US Dollar Index’s bounce-back lacks strength

The US Dollar Index fell to test 95.50 last week in line with our expectation. The index made a low of 95.52 on Tuesday and had reversed higher from there. It made a high of 96.45 on Friday before closing the week at 96.15. The US jobs data release on Friday failed to have a strong impact on the greenback. The US added 2,10,000 to its non-farm payroll in November, much lower than the market expectation for an addition of 5,73,000 jobs. The unemployment rate, however, fell to 4.2 per cent in November from 4.6 per cent in October. For the coming week, Consumer Price Index is the only important data release to watch.

The US Federal Reserve Chairman Jerome Powell, in his speech last week, said that the central bank will discuss increasing the pace of taper in its meeting this month. This has come as a surprise amid the ongoing fear in the market on the back of the new Covid-19 variant, Omicron. Fed had announced earlier that it would reduce the asset purchase by $15 billion per month each for November and December. May be the Fed would increase the pace of the taper but wait longer to begin the interest rate hike.

Dollar Index: Mixed

The support at 95.50 on the dollar index (96.15) mentioned last week has held very well. But the bounce-back thereafter seems to lack strength. Support for this week will be at 95.70. A break below it can drag the index down to 95 initially and then 94.50-94 eventually in the coming weeks. On the other hand, if the dollar index manages to sustain above 95.70, it can rise to 96.50 and 97.

However, as mentioned last week, 97 is a strong support that can cap the upside for some time. An immediate break above 97 looks likely. So, if the dollar index sustains above 95.70 now, then it can remain stuck between 95.70 and 97 for a week or two. It is a wait-and-watch situation now.

Euro: Room to rise

The euro (1.1313) made a high of 1.1383 last week and has come off from there. The resistance at 1.1370 mentioned last week is holding well for now. The broader view continues to remain bearish, but the near-term outlook is mixed. There is a chance of a corrective rise to 1.14-1.1450 in the coming weeks before a fresh fall is seen. The euro will have to break below 1.12 to bring back the selling pressure and fall to 1.11-1.10, going forward.

Overall, the euro can be expected to oscillate in the broad 1.12-1.14 range in the coming weeks and then resume the broader downtrend.

Yields: At crucial support

The US 10Yr Treasury yield (1.36 per cent) extended the fall last week as well. The 10Yr yield fell, breaking below the key level of 1.4 per cent. The 10Yr is now poised at a crucial support level of 1.35 per cent.

A strong and sustained bounce from here can take it back to 1.45-1.5 per cent in the coming weeks. But a strong break below 1.35 per cent will be bearish.

Such a break will increase the chances of the yield tumbling towards 1.2 per cent in the coming weeks. As such, the price action in the early part of the week will need a close watch to see if the 10Yr Treasury yield manages to hold above 1.35 per cent or not.

Rupee: Can weaken further

The Indian rupee continues to remain weak. The domestic currency fell for the second consecutive week against the US dollar. The rupee faced resistance at 74.80 and fell, breaking below 75 to close the week at 75.17 in the spot market. In the offshore segment, the rupee has closed at 75.24.

The outlook is bearish for the rupee. Immediate resistance will be at 75. Next important and strong resistances are poised at 74.80 and 74.60. A break above 75.25 will pave the way for a further fall towards 75.50 and 75.80 in the coming days.

A pull-back thereafter can ease the downside pressure and will increase the chances of the rupee recovering towards 75.50-75 again.

From a medium-term perspective, the region between 75.80 and 76 is a very important support zone for the rupee. The price action in that region will need a close watch. In case the rupee declines below 76 decisively, it will be very bearish.

Such a break will increase the danger of the INR tumbling towards 78 in the coming months. As such, caution is needed as the rupee approaches 75.80-76, going forward.

Published on December 04, 2021

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