Will the Dollar Index maintain its rally?
The US dollar index started the week on a negative note, but then recovered well to keep the broader positive sentiment intact. The dollar index fell to a low of 93.68 on Tuesday, then reversed higher to hit a high of 94.45 on Wednesday. The index retreated from that high to end the week flat at 94.10. The euro failed to hold the breakout above 1.16 and toppled significantly lower than the week’s high at 1.1640 helped the dollar index rise above from 94 again last week.
The release of US employment data on Friday had no impact on the dollar’s movement. The United States added just 1,94,000 to its non-farm payroll in September. The market expected a 4.90,000 increase in non-farm payrolls. However, the unemployment rate fell sharply to 4.8 percent in September from 5.2 percent the month before.
For the week ahead, the US Consumer Price Index (CPI) inflation figures on Wednesday and retail sales on Friday are important data to watch closely.
Dollar Index: Limited decline
The dollar index (94.10) has immediate support in the 93.80-93.75 region. A strong daily close below 93.75 is necessarily needed to put the index under pressure. Such a breakout could drag the index down to 93-92.75 in the short term. On the other hand, if the index manages to hold above 93.75, it may rise to 94.50 and stay in the 93.75-94.50 range for some time.
However, from a broader perspective, the bias is bullish for the dollar index to break down and eventually rise above 94.50. The region between 93 and 92.75 is a solid support area. Only a break below 92.75 will make the outlook for the index bearish to see a deeper fall to 92 or even lower. As long as it is trading above the 93-92.75 area the outlook is bullish. As such, the index has the potential to climb towards 95-96 in the coming weeks. A break above 94.50 may pave the way for this rally.
Treasury yields: at a crucial time
US Treasury yields had surged through the tenors last week. The 10-year Treasury yield rose above 1.5% to test 1.6% as expected. It jumped 15 basis points and closed the week at 1.61%. As mentioned last week, the 1.6 percent level is crucial resistance. It will be important to see if the return stays above 1.6% and exceeds 1.65% from here or not. A pullback anywhere from here and 1.65% and a subsequent fall below 1.5% is needed for the outlook to be bearish and see a deeper fall to 1.4% and lower levels again.
On the other hand, if the yield manages to break through 1.65% decisively from here, then it could be very bullish to test levels of 2% and even higher in the future. As such, the price movement over the coming week will require close monitoring to see whether or not 1.65% caps the rise.
The euro (1.1567) rebounded above 1.16 early last week but failed to hold. The sharp pullback below 1.16 again from the 1.1640 high indicates the presence of new sellers at higher levels. This could continue to keep the euro weak and the rise capped. This week, the euro may dip to test 1.15. Subsequently, a corrective rebound to 1.16 or even 1.17 is possible.
However, the broader view will continue to remain bearish as long as the currency trades below 1.17. As such, the Euro may eventually break 1.15 and extend the decline to 1.14 or even lower in the medium term. A strong and sustained rise above 1.17 is needed to reduce downward pressure and cancel the fall below 1.15.
The Indian rupee fell sharply last week. The currency fell below key support at 74.60. It hit a low of 75.15 on Friday and rallied slightly from there to close in the domestic spot market at 74.99, down 1.15% for the week. However, the rupee had weakened below 75 in the offshore market in Friday’s US session and closed at 75.11. This indicates a possible open below 75 Monday in the spot market. Brent crude prices exceeding $ 80 a barrel weigh on the rupee.
The sharp fall below 74.60 last week reinforced the decline of the rupee. Intermediate support is at 75.25. If the rupee manages to hold above this support, a short-term rally to 74.70-74.60 is possible in the coming days. However, the overall situation will continue to remain weak. It might now be difficult for the Rupee to easily break through the 74.60-74.50 support area from here. As such, the currency is expected to stay below 74.60-74.50 and fall to 75.75-75.80 in the coming weeks.