Technical Analysis

Will the Dollar Index hold on to the gains?

Gurumurthy K BL Research Bureau | Updated on November 20, 2021

Rupee remains resilient in spite of the strength in the greenback

The US Dollar Index has seen a strong rise in the last two weeks. The index has broken above 94.50 and has surged towards 96 in line with our expectation. The dollar index made a high of 96.24 and closed at 96.07 last week. It has risen 1.96 per cent in the last two weeks. A sharp fall in the euro has pushed the dollar index sharply higher. The euro had tumbled well beyond our expected level of 1.14 and made a low of 1.1250 last week. It has closed at 1.1274 and is down 2.52 per cent in the last two weeks.

For the coming week, data on the Personal Consumption Expenditure (PCE) – the US Federal Reserve’s inflation gauge — is due for release on Wednesday. With the stimulus taper already in place, market will watch this data closely to get a cue for the beginning of the rate hike cycle. A strong PCE number will increase chances of the Fed beginning the rate hikes much faster than expected and, in turn, will have a positive impact on the US Dollar.

Dollar Index: Room to rise

The surge to 96 that we were talking about in this column over the last several weeks has happened. There is an immediate resistance at 96.50. A corrective fall from there to 95.50-95 cannot be ruled out. A sideways consolidation between 95 and 96.50 is a possibility in the near term.

However, from a bigger picture, cluster of supports are seen in the 95-94 region. As such, the overall outlook will remain bullish as long as the dollar index stays above 94. That will keep alive the chances of the index breaking above 96.50 eventually. Such a break will then pave the way for a fresh rise to 98. The dollar index will have to fall below 94 now in order to come under pressure and put the uptrend under threat.

Euro: Bearish

The fall to 1.14 has happened much faster than expected. Indeed, the euro has declined well below 1.14 also. The outlook remains bearish.

The euro can still fall further towards 1.1190-1.1185. Inability to bounce from the 1.1190-1.1185 support zone can drag the currency further lower towards 1.1120-1.1100 in the coming weeks. The current fall is likely to halt either at 1.1190-1.1185 or at 1.1120-1.1100. Thereafter, a fresh bounce can take it back to 1.13.

Though a strong reversal is not looking likely, the euro can remain in a sideways range of 1.11-1.13/1.14 for a month or two, going forward.

From a bigger picture, as long as the euro stays below 1.14, there is a danger of it breaking below 1.11 and see a further deeper fall to 1.10-1.08 in the coming months. A strong break above 1.14 is needed to ease the downside pressure. However, the euro will have to rise past 1.16 to bring back the bullishness into the picture.

Yields: Volatile, but range-bound

The US 10Yr (1.55 per cent) Treasury yield has been volatile in the last two weeks. It rose sharply from 1.45 per cent to 1.64 per cent and then has come off from there to the current level of 1.55 per cent. Overall, we can expect the 10Yr Treasury yield to consolidate in the 1.45-1.65 per cent range for some time. Within this range, the chances are high for it to come down towards 1.45 per cent — the lower end of the range. A slightly broader range of trade that is also possible is 1.35-1.75 per cent.

Rupee: Can strengthen further

The near-term outlook is mixed for the rupee. The domestic currency can trade in the range of 74-74.45 for some time. The chances are high for it to break 74 and strengthen towards 73.80-73.70. A slightly broader range of trade could be 73.70-74.60/74.70 for the next few weeks.

However, from a bigger picture, 74.60-74.70 is a strong support. As long as the rupee sustains above 74.70, the chances are high for it break 73.70 and strengthen towards 73.40 and 73.20 in the coming months.

Published on November 20, 2021

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