Technical Analysis

The dollar index may moderate before further rally

The rupee (INR) hit a record low of 77.53 against the dollar on Monday. Although it recovered a bit on Tuesday to close at 77.33, the local currency continues to remain below the psychological 77-mark indicating considerable bearishness. Also, over the past week, particularly post the Fed raising rates by 50 basis points, the Indian currency has been the weakest in Asia by losing 1.1 per cent. Year-to-date, INR has lost a little over 4 per cent. Weak fundamentals indicate that there is more left on the downside.

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Strong dollar and the crude prices continuing to remain at higher levels is taking a toll on the domestic unit. While the dollar index (DXY) is trading above 103.5, the Brent crude prices are hovering around $105 a barrel. Also, the foreign portfolio investors continues to dump Indian assets. In May so far, FPIs have net sold $1.5 billion taking the total net outflow for the year to nearly $20 billion. That said, the charts too show bearish bias for the rupee. But there are expectation of the RBI coming to the rescue of INR as it holds good amount of foreign exchange reserves.

Charts

Over the past week, the local currency extended the fall and it marked a fresh all-time low of 77.53 on Monday. The trend is clearly bearish. From the Tuesday’s close of 77.33, the nearest support can be 77.60 and 78. On the other hand, if INR recovers from here, it can face resistances at 77 and 76.75. Notably though, the rally in the dollar index (DXY) seems to have slowed down slightly.

Going forward, there is a likelihood that DXY might see some moderation in the short-term before resuming its uptrend. On the downside, 102.50 can be the support, below which the support can be spotted at 102 and 101.20. In case if there is a correction, the rupee can probably inch up to 76.75 or even to 75.50. But as it stands, DXY is moving in a tight range and its next leg of move can heavily influence the rupee movement.

Outlook

Fundamentally, the rupee is on the back foot as the dollar and the crude oil prices are at elevated levels. Technically, although the trend is bearish for the Indian currency, the price action of the dollar index over the past few sessions hint at a drop in upward acceleration.

However, that does not mean a trend reversal. So, overall, at the current juncture, the probability of the rupee moving either direction looks equal. Therefore, traders can refrain from trading until we get some more clarity.

Published on May 10, 2022