Technical Analysis

Will the Dollar Index continue to fall?

Gurumurthy K | Updated on April 24, 2021

The level of 90 in the dollar index can halt the current decline

The US dollar index continued to trade weak all through last week. The Dollar Index fell for the third consecutive week and closed at 90.83, down 0.84 per cent for the week. The index has fallen 2.3 per cent over the last three weeks. Strength in the Euro, subdued Treasury yields, weighed on the index. There is room for the dollar to weaken further. The US Federal Reserve policy meeting this week on Wednesday will need a close watch to see if it can give a breather for the dollar index and help it recover.

The US Federal Reserve meeting outcome on Wednesday will be an important event to watch this week. The Fed is likely to keep the rates and stimulus unchanged. However, with the recent economic data releases being robust, it has to be seen if at all the Fed will hint anything of the stimulus tapering. Apart from the Fed meeting, the US Consumer Confidence on Tuesday and the US Personal Consumption Expenditure (PCE) on Friday are the important data releases from the US this week that can influence the dollar and the US equity movement.

Dollar: To get support?

The US Dollar Index (90.83) has been falling over the last three weeks. There is room for it to move down further towards 90.50-90 in the coming days. The level of 90 is an important support. Whether the index manages to sustain above 90 or not will be crucial in deciding the next direction of move. The continuous fall over the last three weeks leaves the chances high for the Dollar index to bounce from 90. In such a scenario, the dollar index can broadly remain in a sideways range of 90-94 for some time. However, on the bigger picture the bias is negative for the index to break 90 and fall to 89-88 eventually over the medium term.

Dow: Mixed

The Dow Jones Industrial Average (34,043.49) oscillated around 34,000 all through the week. The index seems to lack strong follow-through rise above 34,000. Important support is at 33,500. As long as the Dow sustains above 33,500, there are chances for it to move up towards 35,000 in the coming days. A break below 33,500 will negate that chance and a subsequent fall below 33,000 will turn the outlook bearish. Such a fall can then drag the Dow lower to 32,000-31,000, going forward. The level of 33,500 will need a close watch this week.

Last week, there was news that the US government is planning for an increase in capital gains tax to 39.6 per cent from 20 per cent for Americans earning more than $1 million. The details of the same are expected this week. If this gets confirmed, it could become a trigger for the Dow to break below 33,500.

ECB outcome

The European Central Bank (ECB) left the rates and the ongoing stimulus programme unchanged in its policy meeting. However, the central bank had said that it will increase the pace of bond purchases compared to the previous months under the Pandemic Emergency Purchase Programme (PEPP) in the current quarter. The total quantum of purchase under PEPP is €1,850 trillion and the tenor of this stimulus plan is at least until end March 2022. The ECB also expects inflation to rise in 2021 and then come down early next year.

Euro: Near crucial resistance

The Euro has risen towards 1.21 in line with our expectation. Crucial resistance is in the 1.2120-1.2150 region, which will need a close watch this week. A strong rise past 1.2150 is needed for the current rally to extend up to 1.2250-1.2300. Inability to breach 1.2150 can drag the Euro lower to 1.20-1.19 and even lower in the coming week. As such, price action in the 1.2120-1.2150 region will need a close watch this week.

Rupee: To be range-bound

The India rupee (75.0150) is getting support at 75.32 over the last two weeks. The currency can remain in a range of 74.75-75.35 in the near term. A breakout on either side of this range will determine whether the rupee can weaken further towards 75.50-75.75 or strengthen to 74.50-74.40. We will have to wait and watch.

The writer is a Chief Research Analyst at Kshitij Consultancy Services

Published on April 24, 2021

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