Technical Analysis

Will dollar extend gains?

Gurumurthy K | Updated on May 01, 2021

Further strength in the greenback is possible this week

The Dollar Index continued to trade weak almost all through last week. The index fell to a low of 90.42 but made a sharp recovery in the US session on Friday. Euro rose above 1.21 after the US Federal Reserve meeting on Wednesday. However, it failed to sustain higher and tumbled below 1.21 on Friday to close on a weak note at 1.2021. The US Federal Reserve meeting last week became largely a non-event as the central bank made no change in its stance.

Fed on hold

As expected, the US Federal Reserve last week left the market with no surprise. The Fed kept the interest rates and its stimulus programme unchanged. The US Federal Fund rate is currently at 0 -0.25 per cent. The central bank also reiterated to support the economy with the stimulus as long as needed. Currently the Fed’s stimulus asset purchase is of the quantum of $120 billion per month. The outcome of the Fed meeting had no impact on equities. However, the US dollar weakened as the Euro surged above 1.21 after the Fed policy meeting.

The US Dollar Index (91.30) remained weak almost all through the week. However, the index recovered sharply on Friday from the low of 90.42 to close decisively above 91. Short-covering and the strong personal income data release on Friday triggered this sharp reversal in the index. As expected, the Dollar Index is managing to hold above 90. As long as the index now sustains above 91, a further rise to 92 or even to 93 can be seen in the coming weeks. Overall, our view of seeing a broad range of 90-94 remains intact. From a long-term perspective, the dollar index can break this range on the downside and fall to 88-87 eventually.

The Institute of Supply Management’s (ISM) Purchasing Managers’ Index (PMI) on Monday and the US non-farm payroll and unemployment numbers on Friday are the two major data releases to watch this week from the US.

US Treasury yields bounced last week after having fallen for three consecutive weeks. The US 10-year Treasury yield fell to 1.56 per cent earlier last week and has risen back sharply from there to close the week at 1.63 per cent. The 10-year yield is managing to hold above the crucial support level of 1.50 per cent. As long as the yield remains above 1.5 per cent, the chances are high for it to move up again towards 1.8 per cent in the coming weeks. It will also keep the overall uptrend intact. The 10-year yield will have to fall below 1.5 per cent to indicate a trend reversal.

The rise above 1.21 in Euro (1.2021) after the US Fed meeting last week was short-lived. The currency made a high of 1.2150 and fell back sharply below 1.21 in the final trading session of the week. The resistance at 1.2150 mentioned last week has held very well and 1.20 will be an important level to watch this week. A break below it can drag the Euro lower to 1.19 and even 1.18 again in the coming weeks. Key resistance now will be in the 1.2075-1.21 region.

Dow struggles

The Dow Jones Industrial Average (33,874.85) has been stuck at around 34,000 over the last couple of weeks. The immediate outlook is mixed. The index is struggling to get a strong follow-through rise above 34,000 to move up to 35,000. The level of 33,500 is an important support. A break below it and a subsequent fall below 33,000 will negate the chances of seeing 35,000 on the upside. Such a fall will turn the outlook bearish to see a test of 32,000-31,000 on the downside.

Rupee strengthens

The Indian Rupee (74.0650) broke the 74.75-75.35 range on the upside and surged to a high of 73.94 last week. Immediate resistance is in the 73.95-73.90 region which can hold for some time. As long as the rupee remains below 73.90, a corrective fall to 74.30 and even 74.45-74.50 cannot be ruled out this week. Thereafter the rupee can reverse higher again and break above 73.90 to test 73.75 on the upside.

The writer is a Chief Research Analyst at Kshitij Consultancy Services

Published on May 01, 2021

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