The rally in the US dollar index continued for the sixth consecutive week. The index struggled to breach the key resistance at 104 initially. But the index managed to rise past this hurdle on Thursday. The index tested 105 and has come-off slightly from there to close the week at 104.47. The rise above 104 in the dollar index dragged the euro sharply below the support at 1.0480.
Data release this week showed a slight dip in the US inflation. The US Consumer Price Index (CPI) rose by 8.2 per cent for April after rising 8.5 per cent in March. Elevated inflation, prospects for an aggressive rate hike from the US Federal Reserve continue to support the US dollar to retain its strength. For the coming week, there is no major data releases from the US.
Dollar Index: Bullish
The short-term outlook is bullish for the dollar index (104.47). The region between 104 and 103.80 will be a very good support zone. Any further dip from current levels can be limited to 104 itself or 103.80. As long as the index sustains above 104, the chances are high for it to rise further towards 106.
Resistance is at 106 which might hold on its first test. A pull-back from 106 can take the index down to 104. In case the fall extends beyond 104, a test of 102.50 is possible in the coming weeks.
However, the broader trend will continue to remain up; 104 and 102.5 are strong supports. The index has to fall below 102.5 to give an initial sign of a trend reversal. On the charts, the price action remains strong. As such, the chances are high for the index to break above 106 and target 110 over the medium term.
The break and the sharp fall below 1.0480 has strengthened the downtrend in the euro (EURUSD: 1.0410). Though the currency has bounced back from the low of 1.0349, the upside is likely to be capped. The region between 1.0480 and 1.05 will now act as a strong support-turned-resistance. A rise beyond 1.05 looks less likely now.
The view is bearish. The euro can fall to 1.02 and even 1.00 in the coming weeks.
Treasury Yields: Can fall further
The US Treasury yields have come down sharply last week. The US 10Yr (2.92 per cent) has declined sharply below 3 per cent. Though it has bounced from above 2.8 per cent, the short-term view is negative for the yield. It has to rise past 3 per cent decisively to revisit 3.2 per cent levels again. As long as the US 10Yr yield remains below 3 per cent, the chances are high for it to remain in the range of 2.8-3 per cent for some time. It will also keep the chances alive of the 10Yr breaking below 2.8 per cent and extending the fall to 2.7 and 2.6 per cent, going forward.
With strong resistance at 77.20-77, rupee looks vulnerable to break 77.60 and fall to 78.30 in the short term
Rupee: Can weaken further
The Indian Rupee (USDINR: 77.45) opened the week on a weak note with a wide gap-down open below 77. It fell sharply on Monday towards 77.50, but managed to stay stable for the rest of the week.
Support is in the 77.50-77.60 region. But a cluster of resistances is poised in the broad 77.20-77.00 region. Even if the rupee manages to sustain above 77.60, a break above 77 is less probable.
The broader view is bearish. If rupee manages to remain above 77.60, it can trade in the range of 77.20-77.60 or 77-77.60 for some time. But eventually it is likely to break below 77.60 and fall to 78.30 in the coming weeks.
Rupee has to break above 77 in order to gain strength and rise towards 76.50 and higher. But considering the overall strength in the dollar, the break above 77 is less likely.