Currency Outlook: Dollar Rally May Experience a Temporary Pause

The dollar index has shown a notable recovery after reaching a low of 107.75 earlier last week, ultimately closing at 109.65. The sharp increase in the dollar was partly fueled by robust US jobs data released on Friday.

Strong Job Numbers

In December, the US labor market added an impressive 256,000 jobs, significantly surpassing the market expectation of 155,000. This positive news also coincided with a decrease in the unemployment rate, which fell from 4.2% in November to 4.1% in December.

The encouraging employment figures have bolstered the argument for the US Federal Reserve to postpone any interest rate cuts, leading to a surge in US Treasury yields on Friday. The yield on the 10-Year Treasury climbed to 4.78% before concluding the week at 4.76%.

Inflation Watch

As the dollar index continues to gain strength, attention turns to the upcoming Consumer Price Index (CPI) report, scheduled for release on Wednesday. If inflation shows an uptick, this could further intensify discussions about potential rate hikes instead of cuts, potentially driving yields—and the dollar index—higher.

Resistance Ahead

At its current level of 109.65, the dollar index is approaching a significant resistance point at 110.50. It is anticipated that this level may hold during the initial test, leading to a possible short-term decline from 110.50 down to the 109-108 range.

However, after such a correction, the uptrend could resume, and a breakout above 110.50 could propel the index toward 112. From a longer-term perspective, the dollar index could target levels between 118 and 119 in the coming quarters.

Euro Outlook

The euro (EURUSD: 1.0244) continues to decline as forecasted, having fallen below the critical support level of 1.03. In the short term, it could drop further to the range of 1.02-1.0140. Following this dip, a recovery bounce to 1.0250-1.03 is plausible.

However, the broader outlook suggests the euro may trend toward parity against the dollar in the coming weeks, potentially falling as low as 0.98.

US Treasury Yields

The 10-Year US Treasury yield, currently at 4.76%, faces a crucial resistance at 4.8%. A failure to exceed this resistance may result in a pullback to the 4.65-4.6% range in the short term, after which it could potentially climb back toward 4.8%. Conversely, a successful breakout above 4.8% could see yields approach 5% in the near future.

Indian Rupee Performance

The Indian Rupee (USDINR: 85.97) concluded last week at a record low of 85.97. In the offshore market, it fell below the psychological level of 86, driven by the recent increase in US yields and the dollar's strength following the jobs report. It is projected that the onshore segment may open significantly lower this week.

The outlook for the rupee remains negative, with immediate resistance identified at 85.80. The rupee could decline further to the 86.40-86.50 range in the upcoming weeks. A significant uptick above 85.80 would be necessary for any recovery towards the 85.60-85.50 area, which appears less likely. Over the long term, the rupee may drop as low as 87.20.

dollar, jobs, resistance