Currency Outlook: Dollar Gets a Breather

The dollar index fell below 104 last week in line with our expectation. The index made a low of 103.65 and then bounced back towards the end of the week. The recovery in the dollar index came majorly after the European Central Bank (ECB) meeting outcome on Thursday. The ECB left their policy rate (refinancing operations) unchanged at 4.25 per cent.

On the data front, the US GDP numbers on Thursday and Personal Consumption Expenditure (PCE) on Friday are important to watch this week. The PCE is the Federal Reserve’s inflation gauge. A soft PCE number will strengthen the case for a rate cut in September. The next Fed meeting is on July 31. But the CME FEDWatch tool indicates that the market expects the Fed to keep the rates unchanged in its meeting this month. According to that tool, the chances of a rate cut in September are 94 per cent.

Dollar outlook

The bounce towards the end of last week has given some breather for the dollar index (104.39). But the index will now have to stay above 104 and then breach 104.50 to reduce the danger of falling back again. A break above 104.50 can take it up to 105 initially. A subsequent rise above 105 will then see the index extending the rise to revisit 106 levels.

On the other hand, a failure to rise above 104.50 and a fall below 104 will continue to keep the index under pressure. In that case, the index can fall to 103. The price action thereafter will need a close watch.

Resistance holds

The euro (EURUSD: 1.0882) rose to test 1.0950 last week as expected. The currency touched a high of 1.0948 and then came down sharply from there. The near-term picture is weak. The euro can fall to 1.08 this week. The price action thereafter will need a close watch to see if the currency is bouncing back from there or not.

To avoid this fall, the euro has to bounce back immediately and rise above 1.09. If that happens, it can rise again towards 1.0950-1.0970.

Bounces from support

The support at 4.13 per cent on the US 10Yr Treasury yield (4.24 per cent) mentioned last week has held very well. The yield fell to a low of 4.14 per cent and then has risen back well. The chances are high for the yield to see a rise to 4.35 per cent this week. The price action thereafter will need a close watch. A downward reversal from there can take the yield down to 4.15 per cent again. A subsequent fall below 4.15 per cent can drag it down to 4 per cent.

In case the yield manages to breach 4.35 per cent, a rise to 4.5 per cent is possible.

Rupee watch

Rupee can depreciate towards 83.85-83.90 if it stays below 83.60

More weakness

The Indian Rupee (USDINR: 83.67) has moved down gradually last week. It has closed just below the key range support at 83.65.

Immediate resistance is at 83.60. As long as the domestic currency trades below this resistance, the bias will remain negative. That will leave the chances high for the rupee to decline towards 83.85-83.90 in the coming days.

Rupee has to rise above 83.60 to get a breather. Only then it can see a recovery towards 83.40 again.