Currency Outlook: Dollar retains its strength

The dollar index managed to sustain higher all through last week. A strong rise in the US Treasury yields aided the greenback retain its strength. The US 10Yr Treasury yield surged above 4 per cent last week and has closed on a strong note at 4.1 per cent.

Data watch

The US inflation data came in slightly higher than the market expectation. The US Headline Consumer Price Index (CPI) rose by 2.41 per cent (year-on-year) in September. The market was expecting the CPI to rise by 2.3 per cent. This has reduced the hopes in the market to get a 50-basis point rate cut next month.

However, the inflation number was lower than the 2.59 per cent rise seen a month ago. So, the broad trend of inflation coming down in the US remains intact. As such, the US Federal Reverse would continue with its rate cut maybe at a slower pace.

Dollar outlook

The dollar index (102.89) remains bullish. Supports are at 102.25 and then in the 102-101.75 region. Our view of seeing a rise to 103.50-104 mentioned last week remains intact. After that a short-lived corrective dip to 103 is a possibility before the rise resumes.

As mentioned last week, from the big picture, the dollar index may now have the potential to target 105-105 over the medium term.

Resistance ahead

The US 10Yr Treasury yield (4.10 per cent) has risen sharply above 4 per cent last week. There is room to rise and test the 4.15-4.20 per cent resistance zone this week. Whether the yield manages to rise past 4.2 per cent or not will determine the next move.

A break above 4.2 per cent can take the yield up to 4.3 per cent and higher. On the other hand, a turn-around from 4.2 per cent can drag the yield down to 4-3.9 per cent again. That in turn will keep the broader downtrend intact.

Support holds

The euro (EURUSD: 1.0937) fell to test 1.09 last week as expected and then bounced back slightly. Immediate resistance is at 1.0980. The euro has to breach this hurdle and then get a strong follow-through rise in order to ease the downside pressure. Only then the doors will open for a rise to 1.1050-1.1100.

Failure to break 1.0980 can keep the euro vulnerable to break 1.09. Such a break can take the currency down to 1.0850-1.08.

The European Central Bank (ECB) meeting on Thursday will be an important event to watch.

Crucial support

The Indian rupee (USDINR: 84.07) declined below 84 last week in line with our expectation. The domestic currency hit a low of 84.09 before closing the week at 84.07.

A crucial support is at 84.10 which will need a close watch. A decisive break below 84.10 would be very bearish. It will then drag the rupee down to 84.30-84.40 in a week or two.

On the other hand, if the rupee manages to stay above 84.10 and breaks above 84, it can get a breather. In that case, the rupee can recover towards 83.90-83.85.

It is a wait and watch situation now. But considering the broader picture, the chances are high for the rupee to decline below 84.10 if not immediately, but eventually.