Technical Analysis

Will Dollar Index hit pause button?

Gurumurthy K | | Updated on: Nov 27, 2021
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A near-term correction or a consolidation below 97 is a possibility now

The US Dollar Index extended the rise last week in line with our expectation. Indeed, the index rose well beyond our expected level of 96.5. It made a high of 96.94 and had come off sharply towards the end of the week. A sharp fall in the US Treasury yields on Friday on the back of renewed fears about the new Covid-19 variant dragged the dollar index also sharply lower. The rally in the dollar index that has been in place since the last week of October might take a pause here. A corrective fall or a sideways consolidation is possible before the next clear trend emerges.

The coming week is packed with a series of important data releases from the US. Consumer Confidence data is due for release on Tuesday followed by the Institute for Supply Management’s (ISM) manufacturing Purchasing Managers’ Index (PMI) data on Wednesday. The week will end with the market’s much watched US unemployment and the non-farm payroll data on Friday.

Dollar Index: Resistance holds

The US Dollar Index (96.07) had come off sharply on Friday. There is resistance at 97 and it has held very well. There is room for further fall towards 95.75 and 95.50 this week. It will be important to see if the index manages to bounce back from this 95.75-95.50 support zone or not. A bounce from 95.50 can take the index back to 96.50-97. In that case, the dollar index can consolidate between 95.50 and 97 for a week or two.

But if the index breaks below 95.50, it can come under more pressure. Such a break can drag it down to 95 and even 94.50, going forward. As such, the price action in the 95.75-95.50 zone will need a close watch this week.

Euro recovers

As expected, the euro (1.1306) extended the fall to test the 1.1190-1.1185 support zone last week. This support has also held well in line with our expectation. The currency made a low of 1.1186 on Wednesday and has risen back well from there. However, key resistances are coming up at 1.1330 and 1.1370. As such the upside on the euro could be capped from here. We expect the euro to remain below 1.1370 and see a fall back again. While a fresh fall is less likely immediately, we can expect the euro to consolidate between 1.1185 and 1.1370 for some time. The next support below 1.1185 is poised in the 1.1120-1.1100 region.

Yields tumble

The renewed fears on the new Covid-19 variant and concerns about a slowdown on the back of fresh lockdown and restrictions announced in the European countries are weighing on the US Treasury yields. Against this background it will be important to see how the US Federal Reserve will react, going forward. Will the central bank retain the pace of the stimulus taper or will it reduce it? Also, the dot plot will be significant to watch as it would give a cue on the interest rate hikes. The next US Federal Reserve meeting is on December 15.

The US 10Yr Treasury Yield (1.48 per cent) surged to a high of 1.68 per cent during the week and had come off sharply from there. Important support is in the 1.45-1.40 per cent region. A break below 1.4 per cent can drag it to 1.35-1.3 per cent this week.

If the yield manages to bounce from around 1.4 per cent, it can rise back to 1.6 per cent again in the coming weeks. In that case, the 1.4-1.65 per cent sideways range will continue to remain intact for some more time.

Rupee: Supports ahead

The Indian rupee, which remained insulated from the dollar strength so far, got beaten down on Friday as Indian equities also fell sharply. The rupee broke below key support level of 74.7 and made a low of 74.92 before closing at 74.87 in the spot market on Friday. However, in offshore segment it extended the fall up to 75.08 and closed at 75 against the greenback.

The break and a sharp fall below 74.70 last week can continue to keep the rupee under pressure. This has invalidated the chances of the domestic currency strengthening towards 73.40-73.20 mentioned last week. The region between 74.70 and 74.60 will now act as a good resistance for the rupee. There is room for the rupee to weaken towards 75.25-75.30 this week.

A break below 75.30 can drag it further lower towards 75.60-75.65 in the coming days. The Indian rupee will now have to break above 74.60 decisively to bring back the chances of strengthening against the greenback.

Published on November 28, 2021

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