The dollar remained lower last week in line with our expectation. The dollar index rose in the first half of the week but failed to sustain. It touched a high of 107.38 and then fell, giving back all the gains. Sharp fall in the Treasury yields dragged the greenback lower.
Data watch
The US Personal Consumption Expenditure (PCE), the Federal Reserve’s inflation gauge, data release is due on Friday this week. This will be important to watch. A higher PCE number will strengthen the case for the Fed to retain the interest rates at current levels and delay the rate cuts. That in turn can aid the dollar index and the Treasury yields to regain strength.
Dollar outlook
The short-term trend is down for the dollar index (106.64). Resistance is in the 107-107.50 region. The dollar index can fall to 105.50-105. But thereafter, chances are high for the index to reverse higher again. A bounce from anywhere in the 105.50-105 support zone can take the index up to 107-108 again. It will also indicate the resumption of the broader uptrend and keep the doors open for the index to revisit 110 levels again.
The view will go wrong if the index declines below 105. In that case, a fall to 104 and lower levels can be seen. But such a fall looks less likely.
Limited downside
The US 10Yr Treasury Yield (4.43 per cent) was stuck between 4.4 and 4.6 per cent last week. The near-term outlook is weak. The yield can break the immediate support at 4.4 per cent and fall to 4.3 per cent or 4.25 per cent. Thereafter the yield can reverse higher and go back up to 4.4 per cent initially and 4.6 per cent eventually in the coming weeks
Range-bound
The euro (EURUSD: 1.0456) has been bound between 1.0170 and 1.0550 over the last few weeks. That leaves the outlook mixed and unclear. We will have to wait for a breakout on either side of this range to get clarity on the next move.
Since the dollar index is looking weak, chances are high for the euro to breach 1.0550. Such a break can take the currency up to 1.0650 in the short term.
But if it remains below 1.0550, a fall back to 1.03-1.02 can be seen again. A break below 1.04 can trigger this fall.
Stable rupee
The Indian Rupee (USDINR: 86.71) remained stable and range-bound last week. The domestic currency oscillated between 86.47 and 87 more in line with our expectation. We had expected a range of 86.50-87.
The view remains the same. The trading range could be widened slightly to 86.45 to 87.
A break above 86.45 can take the rupee up to 86.30. On the other hand, a break below 87 can see the rupee weakening towards 87.50 and 88.
The big picture remains weak for the rupee. A rise beyond 86 is unlikely. As such we retain the bearish view on the rupee to weaken towards 88-89 in the coming months. As mentioned last week, the pace of this leg of fall could be slow considering the presence of the central bank in the market. Also, there are good chances to see a prolonged sideways consolidation between 86.45-87 or 86-87 before the next leg of weakness happens.
Consolidation time
Rupee can trade sideways between 86.45-87 or 86-87 for some time before the next leg of weakness happens.
