Currency Outlook: Dollar Index Remains Mixed, and Range Bound

The dollar index has been stuck in a narrow range for some time now. The index has been range bound between 104 and 105.50 over the last three weeks. The data release of the US Personal Consumption Expenditure (PCE), the Federal Reserve’s inflation gauge, on Friday did not have much impact on the dollar index. However, the Treasury yields fell after the data release.

The US PCE came in at 2.65 per cent (year-on-year) for the month of May, down from 2.7 per cent in April. Softer PCE number keeps the hope alive for the Fed to begin the rate cuts this year. That in turn had dragged the yields lower.

Mixed outlook

The immediate outlook is unclear for the dollar index (104.67). The 104-105.50 range can continue to remain intact for some more time. A breakout on either side of this range will determine the next move for the dollar index.

A break below 104 can take the dollar index down to 103-102.50. On the other hand, a decisive break above 105.50 will be bullish to see 106.50-107 initially and then 108 eventually in the short term.

Room to fall

The US 10Yr Treasury Yield (4.5 per cent) has come down after making a high of 4.64 per cent last week. The near-term outlook is weak. The yield can test 4.4 per cent. A break below 4.4 per cent can drag the yield further down to 4.3 per cent.

Key resistances are at 4.65 per cent and 4.75 per cent. The 10Yr yield has to breach 4.75 per cent to strengthen the bullish case. Only then the chances of a rise to 5 per cent levels will come into the picture.

Bullish bias

The euro (EURUSD: 1.0848) seems to be struggling to breach 1.09. But at the same time, it is also getting support below 1.08. Key support is in the 1.0780-1.0760 region. As long as the euro stays above this support zone, the bias will be positive to breach 1.09. Such a break can take the currency up to 1.0950 and 1.10 in the short term.

The bullish view will get negated only if the euro breaks below 1.0760. If that happens, then a fall to 1.07 and lower levels can be seen.

The European Central Bank (ECB) meeting is due on Thursday. The outcome of this event will need a close watch.

Rupee watch

Rupee has room to fall further towards 83.55-83.60 in the near term

More weakness

The Indian Rupee (USDINR: 83.46) has declined sharply last week giving back most of the gains made in the previous two weeks.

The near-term outlook is weak. There is room for the rupee to fall further towards 83.55-83.60 this week. The price action thereafter will need a close watch.

A break below 83.60 will see the rupee weakening towards 83.80. On the other hand, if the rupee reverses higher from the 83.55-83.60 zone, then it can recover back to 83.30-83.20.

Broadly, 83 to 83.60 can be the trading range for the rupee. A breakout on either side of this range will determine the next leg of move. It will have to be see as how the domestic currency reacts for the General Election results, due on Tuesday.