Currency Outlook: All eyes on US elections, Fed

The US dollar remained subdued almost all through the week. On Friday the dollar index rose back sharply from the low of 103.68 recovering all the loss. Strong yields are continuing to support the dollar to retain its strength. The dollar index closed flat for the week at 104.28. The US 10Yr Treasury yield on the other hand surged to close the week at 4.38 per cent.

Eventful week

Volatility is guaranteed this week on the back of a couple of very important events. First, the US Presidential Elections on Tuesday will need a watch. If there is a delay in knowing the outcome of the elections, that could keep the markets more uncertain.

The elections will be followed by the US Federal Reserve meeting outcome on Thursday. The market is expecting a 25 basis points (bps) rate cut this week. According to the Fed’s recent economic projections, there is room for a 50-bps rate cut for this year. So, it is important to see if the Fed is going to give two rate cuts (25-bps each) for this year or keeps the rates unchanged now and delivers a 50-bps rate cut together in December.

Dollar outlook

The bullish view is intact. The dollar index (104.28) has potential to test 105.50-106 in the short term. The price action thereafter will need a close watch. The region around 106 is a strong resistance. As such the chances are high for the dollar index to turn down from around 106 and fall back to 104-103 again.

Resistance ahead

The US 10Yr Treasury yield (4.38 per cent) is heading up towards 4.45 per cent inline with our expectation. The level of 4.45 per cent is a strong trendline resistance. So, we expect the current rally in the yields to halt here, and reverse lower. As such the 10Yr Treasury yield can fall back to 4.2-4.15 per cent after testing 4.45 per cent on the upside.

To sum up, it looks like the dollar index and the 10Yr Treasury yield can rise further from here, and then, see a fresh fall after the US elections.

Mixed outlook

The euro (EURUSD: 1.0834) rose to a high of 1.0905 and then has come down from there. Immediate support is at 1.0820. A break below it can take the euro down to 1.0750 and lower again. On the other hand, a bounce from around 1.0820 will see the currency rising back towards 1.09 and 1.0950 again this week. We will have to wait and watch.

Range intact

The Indian Rupee (USDINR: 84.08) continues to remain flat. The currency was stuck between 84.06 and 84.10 last week. Broadly, the 84-84.10 range remains intact. We need to see if the US election outcome gives a trigger for this range to breakout on either side.

From the charts, we retain our negative bias. We expect the rupee to fall to 84.40 in the coming weeks.

A sustained rise above 84 is necessarily needed for it to recover towards 83.90-83.80.