Currency Outlook: Dollar to gain more strength

It was a volatile week for the dollar index. The greenback fell sharply after the inflation data release from the US on Wednesday. However, it managed to recover after the Federal Reserve meeting outcome. The sharp fall in the euro towards the end of the week supported the dollar index to sustain the recovery and move higher.

Inflation cools

The data released last week showed that the inflation is cooling down. The US Headline Consumer Price Index (CPI) rose 3.25 per cent (year-on-year) in May, down from 3.36 per cent in April. The Core CPI came in at 3.41 per cent (year-on-year) for May compared to 3.62 per cent in April.

The dollar index fell sharply after this data release as the easing inflation strengthened the case for rate cuts.

One rate cut

The Fed kept the interest rates unchanged at 5.25-5.5 per cent as expected. The central bank’s economic projection showed that there could be only one rate cut this year. The median Fed Fund rate is forecast to be at 5.1 per cent this year. This is down from 4.6 per cent, per the previous forecast made in March.

Near-term bullish

The dollar index (105.55) has room for a rise to 106-106.50 in the near-term. The price action thereafter will need a close watch. If it manages to breach 106.50 decisively, it will boost the bullish momentum. In that case, the index can rise to 107-108 in the coming weeks.

On the other hand, failure to breach 106.50 and a downward reversal from there will be negative. In that case, the dollar index can fall back to 105-104.50 again.

Room to fall

The US 10Yr Treasury (4.22 per cent) has come down sharply from a high around 4.49 per cent last week. The yield can fall further to 4.1-4.05 per cent. Thereafter, we can expect the yield to bounce back and rise towards 4.3 per cent again.

In case the yield declines below 4.05 per cent and breaks below 4 per cent then a steep fall to 3.8 per cent can be seen. But this is less probable.

Crucial supports

The political uncertainty in France is keeping the euro (EURUSD: 1.0703) under pressure. Crucial supports for the currency are coming up at 1.0640, 1.0620 and 1.0580. The euro can fall to 1.0640-1.0620 atleast if not to 1.0580. A bounce back from there can trigger a relief rally to 1.0750-1.0800 in the coming weeks. The price action this week is going to be very important for the euro.

If the euro declines below 1.0580, a fall to 1.05-1.0450 can be seen.

Stable rupee

The Indian rupee (USDINR: 83.56) was stable in a narrow range last week. Crucial support for the rupee is at 83.60. Resistance is at 83.40. A breakout on either side of 83.40-83.60 will determine the next leg of move.

A break above 83.40 can the rupee up to 83.20 and even 83. In that case, the broader 83.00-83.60 range will continue to remain intact for some more time.

On the other hand, a break below 83.60 can increase the downside pressure. Such a break can drag the rupee down to 83.80 initially and then to 84 eventually in the coming weeks.

Rupee watch

A breakout on either side of 83.40-83.60 is needed to get clarity on the next move