Technical Analysis

Rupee could remain range-bound, but with a bearish bias

GURUMURTHY K BL Research Bureau | Updated on January 09, 2018

Strong dollar and key resistances will limit the strengthening of the rupee

The rupee has been stuck in a sideways range between 64.7 and 65.2 over the last two weeks. The currency hovered around 65 in the initial part of the week.

It, however, got a breather from the government’s bank recapitalisation plan which took the Indian benchmark indices to record highs last week. As a result, the rupee rose to a high of 64.72 on Thursday.

But the party was short-lived as the strong surge in the dollar index after the European Central Bank (ECB) meeting played spoilsport and dragged the rupee lower to 65.11 on Friday. However, the rupee recovered to close at 64.85, up 0.25 per cent for the week.

Data and event watch

The coming week witness a slew of key data releases and important events. This leaves open the possibility of a high level of volatility in the currency market this week.

India’s fiscal deficit data is due for release today. It will be followed by the Nikkei India Manufacturing Purchasing Managers’ Index (PMI) data on Wednesday.

On the global front, the US Federal Reserve meet is due on Wednesday. While nothing new is awaited from the Fed, the market would be waiting for confirmation of the next rate hike in December.

This will be followed by Bank of England’s meeting on Thursday and the market must watch US jobs data release on Friday.

Dollar surges

The dollar index witnessed a strong surge last week after the ECB meeting on Thursday.

The ECB, as expected, announced a cut in its bond purchases from January 2018 until September 2018.

It also indicated that the bond purchases would continue beyond September next year, if needed.

Following the market saying, “buy the rumour, sell the fact”, the euro ran into a selling spree after the ECB meet.

The euro tumbled about 2 per cent from around 1.183 to the dollar and is currently trading at around 1.161.

This sharp fall in the euro saw the dollar index breach and surge above its key resistance level of 94.

The sharp rise last week confirms an inverted head-and-shoulder pattern on the chart. This is a bullish reversal pattern.

The neckline support of this pattern is at 94. Though an interim dip to 94 cannot be ruled out, a fall below this support is unlikely at the moment. As such, the dollar index is all set for a rally to 96 or 96.5 in the coming weeks.

Such a rally in the dollar index can keep the rupee under pressure and limit the upside in the currency.

Weak euro

The outlook for the euro has turned bearish after the ECB meeting last week with a bearish reversal pattern on the chart. As long as it trades below the key resistance at 1.17, a fall to 1.13 against the dollar cannot be ruled out in the coming weeks.

This sharp rally is likely to help the rupee strengthen against the euro. The rupee has strengthened breaking above the key resistance level of 76.5 against the euro.

There is a strong likelihood of the rupee strengthening to 74 or even 73 in the coming weeks.

Rupee outlook

The rupee can remain range-bound for some more time. If the dollar index retreats this week, there is a possibility of the rupee strengthening within this range.

However, since the overall outlook for the dollar index has turned bullish, the strength in the rupee could be limited. Key resistances for the rupee are in the 64.65-64.60 region and then between 64.50 and 64.45. A strong rally breaking above 64.45 is less probable.

Support for the rupee is at 65.20. An expected rise to 96 and 96.5 in the dollar index leaves the domestic currency vulnerable to break below 65.2 and fall to 65.5 and 66 levels again in the coming weeks.

Published on October 30, 2017

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