The dollar index witnessed a corrective fall in line with our expectation last week. The index touched a high of 110.76 initially and fell, giving away all the gains. The sharp fall in the US Treasury yields after the US inflation data-release dragged the greenback lower.

The inflation numbers gave a mixed picture. The US Headline Consumer Price Index (CPI) rose by 2.9 per cent (year-on-year) in December, up from 2.73 per cent seen in the previous month. But the US Core CPI showed some slow down. It rose by 3.25 per cent (year-on-year) in December, down from 3.3 per cent a month ago.

Trump’s inauguration

All eyes are now on Donald Trump’s inauguration on Monday. Any surprise on the tariff front or on immigration could cause volatility in the market. We will have to wait and watch.

Dollar outlook

The strong bounce in the dollar index (109.35) from the low of 108.60 keeps the broader uptrend intact. The upside is still open to test 111. But the price action around 111 will need a close watch. Failure to breach 111 decisively can drag the index down to 109 or even 108 in the short term.

But from a big picture, the dollar index is likely to breach 111 eventually and rise to 114 first and then 118-119 later this year.

Some more downside

The US 10Yr Treasury yield (4.63) came down sharply last week. The resistance at 4.8 per cent has held very well. The short-term picture is weak. Resistance is now in the 4.68-4.7 per cent. As long as the yield stays below this resistance, a fall to 4.5 per cent is possible. A bounce from around 4.5 per cent can keep the 10Yr yield in a range of 4.5-4.8 per cent for some time.

But, a break below 4.5 per cent can see a extended fall to 4.4 per cent. However, a fall beyond 4.4 is less likely.

From a medium-term perspective, the 10Yr has to surpass 4.8 per cent to clear the way for a rise to 5 per cent.

Resistance holds

The euro (EURUSD: 1.0273) is struggling to breach 1.0350. The broader picture is negative. As long as the euro stays below 1.0350, it can fall to 1.0170 initially and then to 1.0100-1.0180 in the short term. Eventually we expect the euro to touch parity against the dollar.

From a big picture, the downside is open to test 0.98 in the coming months.

Knocked down

The Indian Rupee (USDINR: 86.61) fell sharply below 86 last week. Indeed, the domestic currency declined well beyond 86.50. It touched a new low of 86.69 and then managed to recover from there.

But this recovery move faced resistance around 86.30 and the rupee reversed lower again to close the week at 86.61.

The outlook remains bearish. Resistance is in the 86.35-86.30 region. Rupee can breach 86.70 and fall to 87-87.20 in the coming week.

The region around 87.20 is a strong support which can halt the fall for now. We expect the rupee to recover from around 87.20.

More fall
The Indian rupee is likely to break 86.70 and fall to 87-87.20 in the coming weeks.
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