The Russia-Ukraine war has not altered the plans of the global major central banks, atleast for now. The US Federal Reserve, on Wednesday, began its rate hike cycle as expected by increasing the interest rates by 25-basis points (bps). The Fed fund rate now stands at 0.25-0.5 per cent. The Bank of England (BoE) on Thursday hiked its interest rates for the third consecutive time by 25-bps to 0.75 per cent.
The Federal Reserve’s projections showed that six more rate hikes are on the cards for this year. That is, the central bank will be increasing the rates by 25 bps each in all its monetary policy meetings for the rest of the year. The Fed raised its inflation forecast for 2022 on the back of the geo-political tensions between Russia and Ukraine. The Personal Consumption Expenditure (PCE), the Fed’s inflation gauge, is expected to be at 4.3 per cent in 2022, up from its earlier forecast of 2.6 per cent. The growth projection has been revised lower. The Fed expects the US to grow at 2.8 per cent in 2022, sharply down from the earlier forecast of 4 per cent.
The US dollar index dipped slightly after the outcome of the Fed meeting. Broadly, the index has been in a sideways range over the last couple of weeks.
Dollar Index: At a crucial support
The US dollar index (98.23) has been oscillating between 97.7 and 99.45 over the last two weeks. On the daily chart, this two-week movement indicates a double-top formation. Crucial support is in the 97.80-97.70 region. A decisive break below 97.70 will confirm the double-top pattern. That will turn the short-term outlook bearish. In that case, the dollar index can see a fall to 96.5 and even 96 in the coming days. The region around 96 is a strong short-term support that can limit the downside and keep the broader uptrend intact.
On the other hand, if the index manages to sustain above 97.70, a rise back to 99-99.50 can be seen again. As such the price action around 97.80-97.70 will need a close watch this week.
Euro: Mixed outlook
The euro (EURUSD: 1.1055) rose to a high of 1.1137 but has come off slightly from there. The near-term outlook continues to remain mixed. A sideways consolidation looks likely in the near term. 1.09-1.1150 (narrow) or 1.08-1.12 (broad) can be the possible range of trade. A breakout on either side of this range will then decide the next leg of move. As mentioned last week, only a strong break below 1.08 will bring in renewed pressure on the currency. Such a break can drag it to 1.06 and even lower. Similarly, a decisive break above 1.12 will necessarily be needed to become bullish and indicate a strong trend reversal.
The US 10Yr Treasury yield (2.15 per cent) rose towards 2.2 per cent in line with our expectation last week. The yield surged to a high of 2.24 per cent on Wednesday and has come off from there. Important support is in the 2.1-2.05 per cent region. The 10Yr will have to sustain above this support zone in order to rise back and target 2.2-2.3 per cent on the upside. In case the 10Yr Treasury yield breaks below 2.05 per cent a corrective fall to 1.9 per cent is possible in the near term.
The Indian Rupee (USDINR: 75.80) strengthened sharply last week. A strong rally in the equity markets and easing crude oil prices aided the rupee to recover. The rupee rose over a per cent against the US dollar last week.
The short-term trend seems to be turning in favor of the rupee now. An important resistance is at 75.50. A break above it will be very positive for the rupee in the short term. Such a break can pave the way for the rupee to strengthen towards 75 and even 74.50 in the coming weeks.
But inability to breach 75.50 and a subsequent fall below 76 can bring the currency under pressure again. In that case, the rupee can weaken back towards 77 and even 77.25. The price action at 75.50 will need a close watch this week.