The currency market remained broadly stable for the second consecutive week. The US Dollar Index and the euro are stuck in a narrow range. The US Dollar index (96.05) was stuck in between 95.85 and 96.60 last week. The euro (1.1311), on the other hand, oscillated between 1.1225 and 1.1355. As such, the view on the dollar index and the euro broadly remains the same as last week. Market could be waiting for the US Federal Reserve meeting this week. The outcome of this meeting could be key in setting the direction for the currencies, going forward.

The stability in the dollar and euro seems not to be helping the Indian Rupee. The domestic currency continued to fall against the US dollar for the third consecutive week.

Watch the Fed

The Fed Chairman Jerome Powell had already said that the central bank will discuss increasing the pace of stimulus taper in this meeting. As of now the Fed has reduced the monthly bond purchase by $15 billion per month ($10 billion in Treasuries and $5 billion in mortgage-backed securities). This is for November and December. Doubling the monthly taper to $30 billion might not be a surprise for the market and that would already have been priced in the market. But anything more than that would have an impact on the financial markets.

Along with the stimulus taper, the Fed’s dot plot on the interest rate will also be very important to watch. According to the last dot plot (released in September), one hike in 2022 and three hikes in 2023 are expected.

Any significant change in this will also be important to move the markets. The Fed meeting outcome is due on Wednesday.

Dollar: Ranged with a bullish bias

The immediate outlook continues to remain mixed for the US dollar index (96.05). Supports are at 95.75 and 95.50. Resistance is at 97. As long as the index stays above 95.50, the bias is bullish to see a break above 97 eventually. Such a break can take the dollar index up to 98 in the coming weeks. Thereafter the index can reverse lower again. The dollar index will have to break below 95.50 from here itself in order to negate the rise to 98 and come under pressure for a fall to 95 and 94.50. But that looks less probable on the charts.

Euro: Corrective rally possible

The euro (1.1311) is consolidating above 1.12 over the last two weeks. As long as the currency stays above 1.12, the chances are high for it to see a corrective rally towards 1.14-1.1450 and even 1.15 in the coming weeks. However, the broader trend remains down. As such, the upside of this corrective rally could be capped at 1.1450-1.15 and not more than that. We can expect the euro to see a fresh fall from the 1.1450-1.15 region towards 1.12 again. A break below 1.12 will then pave the way for a steeper fall to 1.10 over the medium term.

Yields bounce-back

The crucial support level of 1.35 per cent on the US 10Yr Treasury yield (1.48 per cent) has held very well. The 10Yr yield surged to a high of 1.53 per cent on Wednesday and has come off from there to close at 1.48 per cent, up 12 basis points for the week. On the charts, there is room for the 10Yr Treasury yield to move up towards 1.6-1.65 per cent again as long as it stays above 1.4 per cent now. Broadly, 1.35-1.65 per cent is the possible trading range.

Surprisingly, the strong inflation data release on Friday did not have a major impact on the yield movement. The US Headline Consumer Price Index (CPI) inflation rose 6.8 per cent (Year-on-Year) in November. The Core CPI rose 4.9 per cent (YoY) in November. It could be that high inflation has already been factored in. The Federal Reserve has already changed its stance on the inflation front by stating that high inflation is not transitory. It will be important to see what the outlook on inflation in the Fed meeting will be this week, on Wednesday.

Rupee at a crucial juncture

The Indian rupee (75.77) fell sharply, breaking below the key support level of 75.25 as expected. The domestic currency has tumbled over 2 per cent over the last three weeks. The rupee has crucial supports coming up at 75.80 and 76. The price action in this 75.80-76 support zone will need a close watch. A strong and sustained break below 76 will increase the danger of the rupee tumbling towards 77-78 over the medium term. On the other hand, if the rupee manages to reverse higher from the 75.80-76 region, it can recover towards 75.50-75 again. In that case the currency can continue to retain the broad range of 74-76 in which it has been trading since October.

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