The US dollar remained subdued for most of the week. On Friday, the dollar index rose sharply from a low of 103.68, recouping all the losses. Strong yields continue to support the dollar to maintain its strength. The dollar index closed the week flat at 104.28. The yield on US 10-year government bonds, on the other hand, rose sharply and ended the week at 4.38 percent.
Eventful week
Volatility is guaranteed this week thanks to some very important events. Firstly, Tuesday’s US presidential elections will have to be monitored. If there is a delay in knowing the outcome of the election, it could make markets more uncertain.
The elections will be followed on Thursday by the outcome of the US Federal Reserve meeting. The market expects an interest rate cut of 25 basis points this week. According to the Fed’s recent economic projections, there is room for a 50 basis point rate cut this year. It is therefore important to see whether the Fed will give two interest rate cuts this year (25 basis points each) or leave the interest rate unchanged and implement a joint interest rate cut of 50 basis points in December.
Dollar Outlook
The bullish view is intact. The dollar index (104.28) has the potential to test 105.50-106 in the near term. The price action after that will need to be closely watched. The region around 106 has strong resistance. As such, there is a good chance that the dollar index will fall from around 106 and fall back to 104-103.
Resistance ahead
The yield on 10-year US government bonds (4.38 percent) is rising towards 4.45 percent, in line with our expectations. The 4.45 percent level is strong trendline resistance. We therefore expect that the current interest rate increase will stop here and turn lower. As such, 10-year government bond yields could fall back to 4.2-4.15 percent after testing positive at 4.45 percent.
In summary, it appears that the dollar index and 10-year government bond yields may rise further from here, only to see another decline after the US elections.
Mixed prospects
The euro (EURUSD: 1.0834) rose to a high of 1.0905 before falling again. Immediate support is 1.0820. A break below this could send the euro down to 1.0750 and lower again. On the other hand, a rebound from around 1.0820 will see the coin rise again towards 1.09 and 1.0950 this week. We’ll have to wait and see.
Range intact
The Indian rupee (USDINR: 84.08) remains flat. The currency was stuck between 84.06 and 84.10 last week. Broadly speaking, the 84-84.10 range remains intact. We need to see if the US election result is a trigger for a breakout of this bandwidth on both sides.
The graphs show that we are sticking to our negative bias. We expect the rupee to fall to 84.40 in the coming weeks.
A sustained rise above 84 is necessarily needed to recover towards 83.90-83.80.
Obstacle ahead
US 10-year Treasury yields are at a key resistance where the rally could stall and the trend reverse
