Technical Analysis

Will Dollar Index sustain its recovery?

Gurmurthy K BL Research Bureau | Updated on October 09, 2021

Weakness in the euro can continue to keep the greenback stronger

The US dollar index began the week on a negative note but then recovered back well to keep the broader positive sentiment intact. The dollar index fell to a low of 93.68 on Tuesday and then reversed higher to make a high of 94.45 on Wednesday. The index fell back from this high to close the week on a flat note at 94.10. The euro failing to sustain the break above 1.16 and reversing sharply lower from the week’s high of 1.1640 aided the dollar index to move up above 94 again last week.

US jobs data release on Friday failed to impact the dollar movement. The US added just 1,94,000 to its non-farm payroll in September. Market expectation was to see an increase of 4,90,000 in the non-farm payroll. However, the unemployment rate fell sharply to 4.8 per cent in September from 5.2 per cent in the previous month.

For the coming week, US Consumer Price Index (CPI) inflation numbers on Wednesday and retail sales on Friday are the important data releases to watch closely.

Dollar Index: Limited downside

The dollar index (94.10) has an immediate support in the 93.80-93.75 region. A strong daily close below 93.75 is necessarily needed to bring the index under pressure. Such a break can drag the index down to 93-92.75 in the short term. On the other hand, if the index manages to sustain above 93.75, it can rise back to 94.50 and remain in the 93.75-94.50 range for some time.

However, from a bigger picture, the bias is bullish for the dollar index to break and rise above 94.50 eventually. The region between 93 and 92.75 is a strong support zone. Only a break below 92.75 will turn the outlook bearish for the index to see a deeper fall to 92 or even lower. As long it trades above the 93-92.75 zone, the outlook is bullish. As such, the index has potential to rise towards 95-96 in the coming weeks. A break above 94.50 can pave the way for that rally.

Treasury yields: At crucial juncture

US Treasury yields had surged across tenors last week. The 10Yr Treasury yield rose back above 1.5 per cent to test 1.6 per cent as expected. It surged 15 basis points and closed the week at 1.61 per cent. As mentioned last week, the level of 1.6 per cent is a crucial resistance. It will be important to see if the yield sustains above 1.6 per cent and rises past 1.65 per cent from here or not. A pull-back anywhere from here and 1.65 per cent and a subsequent fall below 1.5 per cent is needed to turn the outlook bearish to see a deeper fall to 1.4 per cent and lower levels again.

On the other hand, if the yield manages to breach 1.65 per cent decisively from here, it could then be very bullish to test 2 per cent and even higher levels, going forward. As such, the price action in the coming week will need a close watch to see if 1.65 per cent is capping the upside or not.

Euro: Bearish

The euro (1.1567) bounced back above 1.16 earlier last week but failed to sustain. The sharp pull-back below 1.16 again from the high of 1.1640 indicates the presence of fresh sellers at higher levels. This could continue to keep the euro weak, and the upside capped. This week, the euro can dip to test 1.15. Thereafter a corrective bounce to 1.16 or even 1.17 is possible.

However, the broader view will continue to remain bearish as long as the currency trades below 1.17. As such, the euro can break 1.15 eventually and extend the fall to 1.14 or even lower over the medium term. A strong and sustained rise past 1.17 is needed to reduce the downside pressure and negate the fall below 1.15.

Rupee tumbles

The Indian rupee fell sharply last week. The currency tumbled, breaking below the key support at 74.60. It made a low of 75.15 on Friday and recovered slightly from there to close in domestic spot market at 74.99, down 1.15 per cent for the week. However, the rupee had weakened back below 75 in the offshore market in the US session on Friday and closed at 75.11. This indicates a possible opening below 75 on Monday in the spot market. Brent crude prices rising beyond $80 per barrel is weighing on the rupee.

The sharp fall below 74.60 last week has strengthened the down move in the rupee. Intermediate support is at 75.25. If the rupee manages to sustain above this support, a near-term recovery to 74.70-74.60 is possible in the coming days. However, the broader picture will continue to remain weak. It could now be difficult for the rupee to break above 74.60-74.50 support zone easily from here. As such the currency is likely to remain below 74.60-74.50 and fall to 75.75-75.80 in the coming weeks.

Published on October 09, 2021

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