Technical Analysis

Will dollar index sustain the rally?

Gurumurthy K BL Research Bureau | Updated on November 06, 2021

With the recent bounce-back, the chances of seeing a break above 94.50 are high

The US Dollar Index has risen back well in the last two weeks. The support in the 93.20-93 region mentioned in this last column has held very well as expected. The index made a low of 93.28 on October 28, 2021, but rose back and closed above 94 last week. The weakness in the euro is keeping the dollar index supported. The euro failed to break above 1.17 and fell sharply from the high of 1.1692.

Overall, the dollar remains strong and room for the euro to fall further can take the dollar index further higher in the coming weeks.

Taper plan

The US Federal Reserve in its meeting last week announced the stimulus taper plan as expected by the market. The central bank will reduce its asset purchase by $10 billion in the Treasury Securities and $5 billion in the mortgage-backed securities this month. In December also the purchase will be reduced by the same quantum in both categories. Accordingly, the asset purchase quantum of the Fed will stand at $60 billion per month in Treasury securities and $30 billion in mortgage-backed securities, totalling up to $90 billion per month.

Currently the Fed is buying assets worth $120 billion per month that comprises $80 billion in Treasury securities and $40 billion in mortgage-backed securities.

On the interest rate front, the central bank has reiterated that it will not be in a hurry to hike the rates.

Dollar: Bullish

The 93-94.50 range on the dollar index (94.22) is holding well for now. The index made a high of 94.62 on Friday and has come off from there. However, the bounce from the October low of 93.28 keeps the bias positive. As such, the chances look bright for the dollar index to break 94.50 eventually in the coming days. Such a break can take it up to 95 initially. If the dollar index manages to rise past 95, then a further rise to 96 is also possible.

Support for the index is in the 93.75-93.50 region. A decisive break below 93.50 is needed to bring the index under pressure. Also, a subsequent fall below 93 might be needed to turn the outlook bearish to see 92 on the downside again.

Euro: Bearish

Failure to break above 1.17 keeps the broader downtrend intact. However, support is at 1.15. As long as the euro (1.1566) manages to sustain above 1.15, there are chances to see a sideways consolidation between 1.15 and 1.17 for some time. But the bias will continue to remain bearish. As such, a break below 1.15 and a fall to 1.14 and even lower levels is more likely to be seen in the coming weeks.

From a bigger picture, the euro will need to rise past 1.17 decisively to ease the downside pressure.

Yields tumble

US Treasury yields have declined sharply in the last two weeks. The US 10Yr Treasury yield (1.45 per cent) has come down below the key level of 1.5 per cent and has tumbled about 20 basis points in the last two weeks. The sharp fall below 1.5 per cent has now negated the chances of seeing a rise past 1.75 per cent. In turn the outlook has turned bearish now. to test 1.4-1.35 per cent. Thereafter a corrective bounce to 1.5 per cent cannot be ruled out.

Rupee strengthens

The Indian rupee has strengthened well breaking above the key resistance level of 74.75 and 74.50 last week. The domestic currency had closed at 74.46 in the spot market on Wednesday. Indian markets were closed on Thursday and Friday on account of Diwali. However, the rupee had continued to strengthen against the dollar in the off-shore market and closed at 74.17 on Friday. This leaves the chances high for the rupee to open with a wide gap-up in the spot market on Monday.

Key supports will now be at 74.35 and then in the 74.50-74.60 region. As long as the rupee trades above these supports, the outlook will remain bullish for the rupee to strengthen towards 73.90-73.80 in the coming days.

A strong break below 74.60 will be needed to bring the rupee under pressure to fall again towards 75 and lower levels. But on the charts, the immediate chances for that look less likely.

Published on November 06, 2021

Follow us on Telegram, Facebook, Twitter, Instagram, YouTube and Linkedin. You can also download our Android App or IOS App.

This article is closed for comments.
Please Email the Editor

You May Also Like