Currency Outlook: Dollar Rally May Pause

The dollar index has recently shown a significant rebound from its previous low. Early in the week, it dipped to 107.75 but sharply rose to finish the week at 109.65. On Friday, the release of US jobs data further supported the greenback, driving its value higher.

Strong Job Numbers

In December, the US economy added 256,000 jobs to its nonfarm payroll, a figure well above the market’s expectation of 155,000. Additionally, the unemployment rate dipped to 4.1% from 4.2% in November.

Impact on Fed Policy

This robust jobs report strengthens the argument for the US Federal Reserve to hold off on rate cuts in the near future. Consequently, US Treasury yields experienced a sharp increase, with the 10-year Treasury yield reaching a high of 4.78% before settling at 4.76% at the week’s close.

Watching Inflation

The upcoming Consumer Price Index (CPI) data set to be released on Wednesday will be crucial. An increase in the CPI would bolster discussions about potential rate hikes instead of cuts, potentially leading to higher yields and a stronger dollar index.

Resistance Levels

As the dollar index (currently at 109.65) approaches a significant resistance level at 110.50, it is likely that this will hold on its first challenge. A correction could occur, pulling the index down to the 109-108 range. However, following this potential drop, the upward trend may continue. A successful breakout above 110.50 could propel the index towards 112.

Long-term Outlook

From a longer-term perspective, the dollar index has the potential to reach targets of 118-119 in the coming quarters.

Euro Decline

The euro (EUR/USD at 1.0244) continues to align with expectations of a decline, having fallen below the critical support level of 1.03. It could soon touch levels around 1.02-1.0140. After this downturn, a minor recovery to the 1.0250-1.03 range may be feasible.

However, from a broader perspective, analysts predict the euro may soon approach parity, potentially dropping to 0.98 or lower in the months ahead.

Treasury Yield Resistance

The US 10-year Treasury yield currently at 4.76% faces a crucial resistance point at 4.8%. Should it fail to surpass this level, a decline towards 4.65-4.6% is possible. Conversely, a break above 4.8% could lead to a surge towards 5% in the upcoming weeks.

Indian Rupee Weakness

In currency news, the Indian Rupee (USD/INR at 85.97) fell to a new low, exacerbated by the increase in US yields and the dollar index following the jobs report. The rupee closed at 86.17 in the offshore market, suggesting a likely significant gap-down in the onshore market on Monday.

The outlook for the rupee remains negative, with resistance set at 85.80. Projections indicate that it could fall to levels between 86.40-86.50 in the near term. A substantial rise above 85.80 would be necessary for any potential recovery towards 85.60-85.50, although this appears unlikely at present.

In broader terms, the rupee could potentially decline toward 87.20 in the coming months.

Currency, Dollar, Analysis