The US dollar index gained strength on Friday after trading stable around 90 all through the week. The index rose in the US session on Friday and has closed at 90.51, up 0.38 per cent for the week. The euro falling sharply from 1.2193 to a low of 1.2093 on Friday aided the dollar index to rise.

The rise in the dollar index was in line with our expectation. Last week, we had said that as long as the index sustains above 89.50 a rise to 91-91.50 is possible within the overall downtrend. This view remains intact with immediate support now at 90. The chances of this rise extending even up to 92 cannot be ruled out. However, the broader trend is still down. As such, we can expect the dollar index to reverse lower again from the 91.50-92 region and keep the overall downtrend intact.

Fed watch

The US Federal Reserve’s monetary policy outcome is due on Wednesday. Earlier last week the European Central Bank (ECB) kept the rates unchanged at 0 per cent. The quantum of asset purchase under the Pandemic Emergency Purchase Programme (PEPP) was also kept unchanged at €1,850 billion at least until March 2022.

Following the strong inflation data release last week from the US, the market will be closely watching to hear from the Fed. US Consumer Price Index (CPI) inflation surged to 4.9 per cent (year-on-year) in May from 4.15 per cent in April. It is to be remembered that the Fed has already forecast for inflation to rise in 2021 and come down next year. So the recent surge in inflation could very well be in line with the central bank’s expectation.

However, it will be important to see if there is any change in their stance on the inflation front. Secondly, the market will be keen to see if they are giving any hint on reducing the size of their bond purchases under the current stimulus programme. The outcome of the Fed meeting this week will be crucial in driving the dollar index and the US Treasury yields.

The US 10Yr Treasury (1.45 per cent) declined sharply by 10 basis points and has come down to 1.45 per cent as mentioned last week. It has a very crucial support now at 1.4 per cent, which has to necessarily hold in order to avoid a deeper fall from here towards 1.25-1.2 per cent. A strong bounce from 1.4 per cent can take the yield up to 1.5-1.6 per cent again. It will also keep the overall uptrend intact. The outcome of the Fed meeting this week will be key in deciding whether the yield will sustain above 1.4 per cent or not.

Euro – room to fall

The euro (1.2109) failed in its various attempts to breach 1.22 sharply and had tumbled to close just above 1.21. The near-term view is bearish. A fall to 1.20 is likely this week. 1.20 is a very crucial support that will need a close watch. A bounce from there can take it up to 1.21-1.22 again. But a break below 1.20 will increase the downside pressure and drag it to 1.19 or even lower. The price action at 1.20 will need a close watch this week.

Rupee under pressure

The resistance at 72.75 mentioned last week has held very well. The Indian rupee made a high of 72.7375 and fell to close at 73.07 on the spot market. However, the currency extended the fall in the off-shore market and has closed at 73.24. A break below 73.30 can take the rupee lower to 73.50. A further break below 73.50 will increase the downside pressure and can drag the rupee to 73.75 and even 74 again. The price action at 73.50 will need a close watch this week. Resistances are at 73 and 72.90

The Dow Jones Industrial Average (34,479.6) remained broadly stable above 34,500 for most part of the week. A near-term dip to 34,000 looks possible. However, the bigger picture is still bullish. Important supports are at 34,000 and 33,500. As long as the Dow stays above these supports, the chances are high for it to breach 35,000 and rise to 36,000 eventually in the coming weeks.

The writer is a Chief Research Analyst at Kshitij Consultancy Services