The US dollar index saw a rise towards 106 as expected ahead of the Federal Reserve meeting last week. The index made a high of 105.8 on Wednesday and then fell sharply on Thursday giving back all the gains made during the week. It made a low of 103.42 and then recovered to close the week marginally higher by 0.45 per cent at 104.65.
Central Banks’ actions
The US Federal Reserve on Wednesday increased the interest rates by 75-basis points as was widely expected by the market. The Fed fund rate range is now 1.5-1.75 per cent. The central bank’s forecasted median rate for 2022 has been increased to 3.4 per cent from 1.9 per cent projected in March. This means that a 50-bps rate hike is for sure from the Fed in the next four meeting left for the rest of the year. The Fed has revised the growth forecast for 2022 to 1.7 per cent from 2.8 per cent.
The Bank of England (BoE) increased their policy rates by 25 bps to 1.25 per cent. This is the fifth consecutive rate hike from the BoE.
The European Central Bank (ECB) called for an ad-hoc meeting last week and decided to have flexibility in reinvesting the redemptions from the Pandemic Emergency Purchase Programme (PEPP).
Dollar index: Near term mixed
The immediate outlook for the US dollar index (104.65) looks mixed. The index has equal chances to move either way from current levels; 103-106 can be a possible trading range for some time. A breakout on either side of this range will then determine the next direction of move.
From a big picture, 103-102.50 is a strong support zone. As long as the index remains above this support, the overall uptrend will intact. As such, the chances are high for the dollar index to breach 106 in the coming days. Such a break will pave way for a fresh rally targeting 110 and even higher levels in the coming months.
Euro: Series of resistances ahead
As expected, the euro (EURUSD: 1.0499) fell to 1.04 last week. The currency made a low of 1.0358 and then had risen back well. Last week’s candle indicates indecisiveness. Important resistances are at 1.06, 1.07 and 1.08. The euro will have to breach 1.08 to ease the downside pressure and become bullish to test 1.10 levels.
For now, 1.0350-1.06 (narrow) or 1.0350-1.08 (broad) can be a possible trading range. A breakout on either side of 1.0350 or 1.08 will give us a clarity on the next move.
Since the dollar index is likely to remain above 102.5 and rise past 106, the chances are high for the euro to break below 1.0350 and fall to 1.02 and even lower levels in the coming months.
US Treasury yields: Corrective fall ahead
The US Treasury yields surged ahead of the Federal Reserve meeting last week. The US 10Yr Treasury yield (3.23 per cent) surged to a high of 3.48 per cent and then has come off sharply from there. The resistance at the 3.4-3.5 per cent is holding well for now. An intermediate corrective fall to 3 per cent or 2.9 per cent can be seen in the coming days. Thereafter, a bounce-back move is possible.
Immediate outlook is unclear. 78-78.20 can be the near-term trading range
Rupee: Stuck in a range
The Indian Rupee (USDINR: 78.08) was stuck in a narrow range of 78-78.10 all through the week. This leaves the immediate outlook unclear for the domestic currency. Supports are at 78.10 and 78.20. So, 78-78.20 can be a possible trading range in the near term. A breakout on either side of 78 or 78.20 will determine the next move.
A break below 78.20 can take the rupee down to 78.50 and even lower. On the other hand, rupee can strengthen towards 77.80 and 77.50 if it manages to break above 78.