It was a week of rate hikes in the global markets. The US Federal Reserve increased the rates by 50 basis points (bps) as was widely expected. The US Fed rate range now stands at 0.75-1 per cent The central bank indicated that a 75 bps hike in its upcoming meetings is not under consideration for now. There has been speculation in the market that the Fed can turn aggressive and increase rates by 75 bps in the any of its meetings in the coming months. The US Dollar index fell sharply after the Fed meeting outcome and made a low of 102.35.
On Thursday, the Bank of England (BoE) increased the rates by 25-bps to 1 per cent. This is the fourth consecutive hike from the BoE. The central bank warning of a strong growth slowdown and a possible recession knocked down the British Pound badly. The currency tumbled from around 1.26 to close the week just above 1.23 against the US dollar, down over 2 per cent. The fall in the Pound aided the dollar index to recover sharply and close higher for the week at 103.66.
The real surprise can from India. The Reserve Bank of India (RBI) surprised the market with a 40-bps hike in its policy rate on Wednesday in an off-cycle meeting. Though the rupee managed to strengthen towards 76 after that, it failed to sustain. The strong bounce in the dollar index and the sharp sell-off in the Indian equity markets dragged the rupee lower on Friday.
Dollar Index: Bullish
The resistance-turned-support level of 102.5 has held very well last week. The dollar index (103.66) has risen back sharply from the low of 102.35. This keeps the overall uptrend intact. Immediate resistance is at 104. A decisive break above this hurdle can boost the bullish momentum. In that case the dollar index can rise to 105.80-106 in the next two-three weeks.
Inability to breach 104 can keep the index in the range of 102.50-104 for some time. As mentioned last week, the index has to see a decisive break below 102.5 and then a subsequent fall below 100 to turn bearish and indicate a trend reversal.
The euro (EURUSD: 1.0550) remained stable and oscillated in a narrow range all through the week. The currency is getting good support above 1.0480 now. However, a strong break above 1.06 will be needed to ease the downside pressure and see a relief rally to 1.08. It is a wait and watch situation for the currency. Since the dollar index is looking bullish, the euro can remain vulnerable to break below 1.0480. Such a break will pave way for a fresh fall to 1.02 and even 1.00 in the coming weeks.
Treasury yields: Resistance ahead
The US 10Yr Treasury Yield (3.23 per cent) has surged breaking above the crucial 3 per cent mark. Indeed, it has risen above the first target level of 3.2 per cent. There is room to test 3.3-3.4 per cent in the coming weeks. The region between 3.3-3.4 per cent is a strong resistance which can halt the current rally. Inability to rise past 3.4 per cent can trigger a reversal. As such the price action in the 3.3-3.4 per cent region will need a close watch.
Rupee: Can weaken further
The Indian rupee (USDINR: 76.92) strengthened to test 76 after the RBI increased the rates on Wednesday. But the domestic currency reversed sharply lower on Friday to close the week on a weak note at 76.92.
Resistance is at 76.80-76.75 while below which the rupee is vulnerable to break 77 and weaken to 77.50.
Immediate resistance is at 76.80-76.75. Rupee has to breach this hurdle to ease the downside pressure and strengthen back towards 76.50 and 76.25 again. But on the charts, the picture is looking weak. As such the chances are high for the rupee to remain below 76.75 and break 77. Such a break will see the rupee weakening towards 77.50 in the short-term.