Technical Analysis

Will US Dollar Index test 95?

Gurumurthy K BL Research Bureau | Updated on October 02, 2021

A strong surge in Treasury yields aided the rise in dollar index

The rally in the US Dollar Index gathered momentum last week. The index rose sharply, breaking above the key resistance level of 94. A strong surge in the Treasury yields aided the rise in the dollar index. The strength in the dollar index dragged the euro sharply lower, which tumbled below the crucial support level of 1.1680 to test a low of 1.1563 towards the end of the week. The euro closed at 1.1594 on Friday, down 1.06 per cent for the week. The dollar index closed at 94.07, up 0.85 per cent for the week.

Dollar Index: Support ahead

The US Dollar Index (94.07) surged to a high of 94.50 on Thursday and has come off from there. However, an important support is at 93.80. A bounce-back move from this support can take the index higher to 94.50 again. Also, as long as the index sustains above 93.80, the outlook will remain bullish and the chances of seeing a break above 94.50 and a rise to 95 and even higher levels cannot be ruled out.

The index has to break below 93.80 to come under pressure for a fall to 93 in the near term. However, from a bigger picture, the dollar index will now have to decline decisively below 93 to turn the outlook bearish completely. The trend will be up and the chances of seeing 95 on the upside will be possible as long as the dollar index trades above 93.

The US Non-Farm Payroll (NFP) and unemployment numbers are the only major data scheduled to be released at the end of the week on Friday.

Euro bearish

The euro (1.1563) fell to test 1.16 as expected. However the pace of fall and the extension beyond 1.16 to make a low of 1.1563 was a surprise. The sharp fall breaking below the key support at 1.1680 has strengthened the bearishness in euro. The region between 1.1680-1.17 can be a good resistance for the week. The euro can fall to 1.1520-1.15 in the near term. A short-lived bounce to 1.16-1.1650 thereafter cannot be ruled out. From a bigger picture, the euro will now have to break above 1.18 to ease the downside pressure and move up further. As long as the currency trades below 1.18, the broader outlook is bearish. As such, a break below 1.15 and an extended fall to 1.14 and even lower levels cannot be ruled out in the coming months.

The bearishness in the euro suggests that the dollar index can very well stay above 93 and move up to 95 and even higher in the coming months.

Yields retreat

The US 10Yr Treasury Yield (1.46 per cent) rose above the key resistance level of 1.5 per cent earlier last week. However, it failed to sustain higher and had come off below 1.5 per cent again after testing a high of 1.56 per cent . A crucial resistance-turned-support is near current levels at 1.45 per cent. The 10Yr yield will have to break below it to confirm a reversal. Such a break can then drag the US 10Yr yield lower to 1.4-1.3 per cent again. On the other hand, if the yield manages to sustain above 1.45 per cent and breaks above 1.5 per cent again, then a fresh rise to 1.6 per cent is possible. The level of 1.6 per cent is a crucial resistance to watch on the upside.

Rupee weakens

The Indian rupee weakened sharply last week, breaking the 73.60-73.80 range on the downside. The domestic currency fell sharply to a low of 74.35 on Thursday. However, it managed to recover on Friday and close the week at 74.1250, down 0.6 per cent for the week. Immediate resistance is at 73.95 which can limit the upside in the rupee for this week. The rupee can reverse lower again from the 74.00-73.95 region and fall back towards 74.50-74.60 in the near term. Resistance above 73.95 is poised at 73.80-73.75.

The Indian rupee will have to breach 73.75 in order to reduce the downside pressure and rise to 73.50 levels again. But considering the weakness in the euro which can take the dollar index up to 95 and higher levels, the chances of the rupee strengthening beyond 73.75 are less probable. As such the upside is likely to be limited in the Indian rupee and we can expect the currency to weaken towards 74.50 and even lower in the coming weeks.

The Reserve Bank of India’s monetary policy decision is on Friday.

Published on October 02, 2021

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