Technical Analysis

Will dollar go below a crucial support this week?

Gurumurthy K | Updated on May 22, 2021

89.4 and 89.2 are key levels for the dollar index as a raft of economic data releases comes in

The US Dollar Index fell below 90 last week as expected. But the index managed to remain stable thereafter above its crucial support level of 89.40. The US Federal Reserve’s minutes of the April meeting aided a bounce above 90 again on Wednesday. The Fed’s meeting indicated that the central bank could begin discussion on adjusting the pace of asset purchase if the economy continues to show rapid progress. Currently the Fed is purchasing bonds worth $120 billion per month.

This triggered a rise in the US Treasury yields and in turn took the Dollar Index higher. But the impact was short-lived as the Dollar Index failed to get a strong follow-through rise and continued to oscillate around 90 for the rest of the week.

The economic data releases, going forward, will need a close watch. Any strong data release will boost talk in the market about the Fed tapering its assets purchase and might support the dollar index. Some of the key data releases from the US to watch this week are Consumer Confidence on Tuesday, GDP on Thursday and lastly the Fed’s much watched indicator, the Personal Consumption Expenditure (PCE) on Friday.

As mentioned last week, 89.40 is an important support. Below that 89.20 is the next crucial level. The Dollar Index has to sustain above 89.20 in order to see a bounce-back move towards 90.50 and 91. As pointed out in this column earlier, the broader view on the Dollar Index is bearish to see a break below 89 and see a fall to 88-87 over the medium term. It will have to be watched whether this fall can be seen from here itself now, or after a consolidation between 89 and 91/92 for some more time.

The euro (1.2181) broke above 1.22 but failed to get a strong follow-through rise after that. The currency is facing resistance just below 1.2250. A strong rise past 1.2250 is needed to move further up towards 1.23-1.2350. Cluster of supports are poised in the 1.2150-1.21 region.

Euro will have to fall below 1.21 decisively in order to come under pressure. As long as the currency trades above 1.21, the broader outlook is bullish.

The US 10Yr Treasury yield (1.62 per cent) rose to 1.66 per cent after the Fed meeting minutes release and had come off slightly from there. The near-term outlook is mixed.

The yield has been range-bound between 1.55 per cent and 1.7 per cent and is likely to retain this range. From a bigger picture, as long as the yield remains above 1.5 per cent, the chances are high for it to break 1.7 per cent and rise to 1.8 per cent in the coming weeks. Thereafter a fresh fall is possible.

Dow to be range-bound

The Dow Jones Industrial Average (34207.84) tested the crucial support level of 33,500 last week. The index tumbled to a low of 33,473.8 on Wednesday. However, it had recovered sharply from there to close the week above 34,000.

The Dow could remain sideways between 33,500 and 35,000 for some time. The levels of 33,500 and 33,000 are important supports for the Dow. The index has to fall decisively below 33,000 in order to become bearish.

As long as the Dow remains above 33,000, the broader view is bullish to see a break above 35,000 and a rise to 36,000, going forward.

Rupee at crucial resistance

The Indian rupee (72.8350) strengthened in the past week, breaking above 73. The bounce-back to 73.50 that was expected last week, from 73, has not happened. Crucial resistance is at 72.80.

The currency broke this resistance in the off-shore market of Friday and had made a high of 72.75 before closing at 72.81. The price action on Monday will need a close watch to see if the rupee remains below 72.80 or breaks above it.

If it manages to break above 72.80 on Monday, a further rise to 72.60-72.50 is possible this week. On the other hand, if the rupee fails to breach 72.80, it can reverse lower towards 73 and 73.20 again. We will have to wait and watch.

The writer is a Chief Research Analyst at Kshitij Consultancy Services

Published on May 22, 2021

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