Currency Outlook: Euro Knocks Down The Greenback

The dollar index tumbled over 3 per cent last week. The euro surging over 4 per cent last week knocked down the dollar. The trigger for the rise in euro came from the German government’s proposed new plan to increase its spending.  The German 10Yr Bond Yield surged from around 2.5 per cent to 2.8 per cent after this news. It ended the week at 2.85 per cent. The rise in the bond yield helped the euro to breach its crucial resistance level of 1.0550 and surge towards 1.08. That in turn dragged the dollar index below its key support level of 105. Surprisingly the US 10Yr Treasury Yield rose last week and could not aid the greenback to move higher.

The European Central Bank (ECB) meeting on Thursday and the jobs data release from the US on Friday turned out to be relatively inconsequential as the impact of the German spending news overshadowed the market. The ECB cut the interest rates by 25-basis points as expected. The US added 151,000 jobs to non-farm payroll and the unemployment rate inched up to 4.1 per cent.

Dollar outlook

The strong fall below 105.50 is negative for the dollar index (103.84). That negates our earlier bullish view on the dollar index to see 110 on the upside. Strong resistance will now be at 105-105.50. Any bounce from here may be capped at 105-105.50.

The outlook is bearish. We can expect the dollar index to fall to 102, and even 100 in the coming weeks.

Limited upside

The US 10Yr Treasury Yield (4.30 per cent) rose back above 4.25 per cent last week. If it manages to sustain higher, a further rise to 4.4 per cent, and even 4.5 per cent is possible. However, a rise beyond 4.5 per cent is unlikely. As such, we can expect the yield to reverse lower again from around 4.4 per cent or 4.5 per cent. An eventual break below 4.25 per cent can drag it down to 4.1-4 per cent and even lower.

More upside

The strong surge above 1.0550 in the euro (1.0833) is positive. That leaves the outlook bullish. The broad region between 1.06 and 1.05 will now act as a strong support. The euro can rise to 1.10 in the short term. A decisive break above 1.10 will see an extended rise to 1.11 and 1.12.

Rupee recovers

The fall in the dollar has helped the rupee (86.88) recover above the psychological 87 mark. The rupee can rise further towards 86.50 this week. But the price action thereafter will need a close watch. Failure to breach 86.50 can take the rupee down to 87, and even 87.50 in the short term. A strong break above 86.50 is needed to move up towards 86.25 and 86 again.

Overall, we can look for a range of 86.50-87.50 (narrow) or 86-88 (wide) on the rupee for some time.