The Dow Jones Industrial Average broke above the psychological 34,000 mark and surged to record highs last week. This was contrary to our expectation to see a corrective fall from 34,000-34,100. The index made a high of 34,256.75 and closed at 34,200.67 on Friday, up 1.18 per cent for the week. Strong economic data releases such as the US retail sales, industrial production and housing starts helped the Dow to break above 34,000.

Almost all the data releases from the US last week were robust. The US retail sales surged 9.4 per cent (month on month) in March to $556 billion in March from $508 billion in February. The industrial production index rose to 105.6 in March from 104.1 in the previous month. Housing starts in the US showed a strong pick up after having fallen over the first two months of this year. Housing starts surged to 1,739,000 in March from 1,457,000 a month ago. The coming week is light on the data release front in the US barring a couple of housing numbers that will come out in the second half of the week.

The break and strong close above 34,000 last week has brought back the bullish momentum in the Dow. It has also negated our earlier view of seeing a corrective fall breaking below 33,000 to 32,000-31,000. As long as the Dow sustains above 34,000, the outlook is bullish. A further rise to 35,000 is possible now. The Dow will now have to fall below 34,000 to give an early sign of reversal.

Treasury yields fall

The US treasury yields saw a sharp fall last week. This came as a surprise in spite of a sharp rise in the inflation numbers and a strong rise in the equities. The US Core Consumer Price Index (CPI) inflation rose to 1.6 per cent (year-on-year) in March from 1.28 per cent in February. As mentioned above, the inflation data failed to support the yields. The US 10 yeartreasury yield fell last week and closed at 1.58 per cent, down 8 basis points for the week. A crucial support is at 1.5 per cent which can be tested this week. A bounce thereafter can keep the yield in a sideways range of 1.5 per cent-1.8 per cent. It will also keep the current up trend intact. A strong fall below 1.5 per cent is needed to indicate a trend reversal. So, the price action around 1.5 per cent will need a close watch now.

Euro up, dollar down

As expected, the euro (1.1984) rallied for the second consecutive week. The outlook is bullish. The up move can extend up to 1.2050 or even to 1.21 in the near term. The price action in the 1.2050-1.21 region will need a close watch. Inability to breach 1.21 can drag the Euro lower to 1.20-1.19. In such a scenario, the chances of the Euro running into a broad sideways range of 1.17-1.21 for some time. A strong rise past 1.21 is needed for the Euro to keep the current up move in place.

The US dollar index (91.54) has declined below 91.8 – the support mentioned last week. The view remains bearish and the dollar index can test 91 in the near term. A break below 91 can even drag the dollar index lower to 90. We reiterate that the dollar index can remain in a sideways range of 90-94. The bias is bearish for the index to break the range on the downside and fall further eventually over the medium term.

Rupee recovers

Last week we had expected the rupee to remain above 74.95 and strengthen to 74.40-74.20 before weakening back to 75-76 levels. On the contrary, the currency first weakened to 75.32 last week and then recovered sharply to close the week at 74.3550. Immediate resistance is at 74.20, which can hold on its first test.

The rupee is likely to weaken back to 74.80-74.90 in the coming week. A fall below 74.90 can drag it to 75-75.25 again. On the other hand, if the rupee manages to recover again from 74.90, it can test 74.20 or even 74 on the upside going forward.

In that case, the chances of seeing 76 levels that was mentioned last week will get reduced. The price action in the 74.80-74.90 region will need a close watch.

The writer is a Chief Research Analyst at Kshitij Consultancy Services

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