The US dollar index has been stuck in between 95.50 and 97 over the last four weeks. Within the range the index remained volatile in the past week by oscillating up and down. The outcome of the much-awaited US Federal Reserve meeting last week did not have a major impact on the greenback. The euro is also continuing to trade volatile within the expected range of 1.12-1.14.

For the coming week, the US Personal Consumption Expenditure (PCE) data release on Thursday will be the most important to watch. A strong PCE number will have a positive impact on the US dollar and Treasury yields.

Central banks’ action

The US Federal Reserve kept the rates unchanged last week. However, as expected, the central bank announced increase in the pace of the stimulus taper. Accordingly, the Fed will reduce the asset purchase by $30 billion from January. At this rate, the central bank will wind down the asset purchase by March — much earlier than June as was projected earlier. In addition to this, the Fed’s dot plot has also indicated the chances of three rate hikes in 2022 itself. This is up from one rate hike given the September projection.

Following the US Federal Reserve, the European Central Bank (ECB) on Thursday last week announced that it will reduce the pace of its Pandemic Emergency Purchase Programme (PEPP) in the first quarter next year and will end it by March 2022.

In the UK, the Bank of England increased the rates by 0.15 percentage points from 0.1 per cent to 0.25 per cent last week. The British Pound surged to a high of 1.3374 against the US dollar after the central bank’s decision. However, the currency fell sharply on Friday, giving back almost all the gains to close the week at 1.3224.

Dollar Index: Can the range break?

The view on the dollar index (96.67) remains the same. The broad 95.50-97 range is likely to remain intact for some more time. The bias continues to remain bullish to see a break above 97 and see a rise to 97.50 and 98 eventually. The level of 98 is a crucial resistance, which will need a close watch. Inability to breach 98 can drag the dollar index down to 96-95 again. But a strong break above 98 will be very bullish that could open doors for the dollar index to test 100 levels as we head into the new year 2022. Strong support for the index is at 95-94.80. The outlook will turn bearish to see 94 and lower levels only if the dollar index breaks below 94.80.

Euro: Ranged with a bearish bias

The euro (1.1238) oscillates within the broad expected range of 1.12-1.14. Within this range, the currency is struggling to see sustained break above 1.1350 over the last three weeks. This is reducing the chances of seeing an extended rise to 1.1450-1.15 that we had mentioned last week. It also, keeps the broader bias bearish to see a downside break of this range below 1.12 eventually going forward. Such a break can drag the euro down to 1.10 and even lower in the coming weeks.

Yields fall back

The US 10Yr Treasury yield (1.41 per cent) failed to extend the rise and fell back sharply last week. A break below 1.4 per cent can drag the yield down to 1.3 per cent. The level of 1.3 per cent is a crucial support. If the 10Yr manages to bounce from there, a rise back to 1.5 per cent can be seen in the coming weeks. It will also keep the 10Yr Treasury yield in the broad range of 1.3-1.65 per cent for some time. In case the yield breaks below 1.3 per cent it can fall to 1.2 per cent, going forward. As such, the price action around 1.3 per cent will need a close watch in the coming days.

Rupee: Room to recover

The Indian rupee (76.09) extended the fall for the fourth consecutive week. The domestic currency fell, breaking below the key support level of 76 and made a low of 76.31 last week.

However, it has managed to recover from the low to close the week at 76.09, down 0.42 per cent. The rupee has declined 2.4 per cent against the dollar in the last four weeks. The currency has managed to move up further slightly in the offshore segment and has closed at 75.97.

There is room for the rupee to recover further towards 75.75. But a rise past 75.75 could be difficult considering the broader bullishness in the dollar. As such the rupee is likely to reverse lower again and fall below 76 to revisit 76.25-76.30 levels in the coming weeks. Broadly, 75.75-76.30 can be the range of trade for the next two-three weeks. From a medium-term picture, the outlook for the rupee is looking bearish. A fall to 78 is more likely to be seen in 2022.

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