The Fed raised its inflation forecast for 2021 and its dot-plot suggests two rate hikes in 2023
The outcome of the US Federal Reserve meeting jolted the markets last week. The Fed raising its inflation forecast for 2021 and its dot-plot suggesting two rate hikes in 2023 triggered a sharp rise in the US Dollar Index. That, in turn, saw risky assets such as the non-dollar currencies and equities tumbling. The US Treasury yields rose at the near periods (2-year and 5-year) and fell sharply at the long period (10 -year and 30-year).
The Fed increased the Personal Consumption Expenditure (PCE) inflation forecast to 3.4 per cent in 2021. Earlier in March, the Fed had projected the PCE at 2.4 per cent in 2021.
The Dollar Index (92.32) has surged well beyond 92, contrary to our expectation to see a reversal from there. There is room to test 93 this week. A break above 93 can take the index further up to 94. On the charts, 93 and 94 are very crucial levels to watch, going forward.
If the current surge takes the index above 94, it would then indicate a strong trend reversal. Such a move can negate the earlier bearish view of seeing 87-86 on the downside. So, the price action in the coming weeks will need a close watch to see if the dollar index is going to rise past 94 or not.
The euro (1.1862), as cautioned last week, has declined sharply after breaking below the key level of 1.20. A further fall to 1.18-1.1780 is possible this week. It will have to be seen if the euro can bounce back from the 1.18-1.1780 support zone. In case of a break below 1.1780, the fall can extend up to 1.1750 and even 1.1700, going forward. The price action in the 1.18-1.1780 region will need a close watch this week.
Yield curve flattens
The short tenor US Treasury yields surged, while the long period yields declined sharply last week. The 2-year and 5-year yields surged 10 basis points (bps) and 14 bps respectively to close the week at 0.25 per cent and 0.87 per cent respectively. At the far-end the 10-year surged to 1.57 per after the Fed meeting outcome but fell back thereafter to close at 1.44 per cent on Friday.
The 30-year yield closing at 2.02 per cent on Friday was down 12 bps last week. Both the 10-year and 30-year have room to fall another 10 bps to test 1.35 per cent and 1.9 per cent. It will have to be seen if the yields can rebound thereafter.
The Dow Jones Industrial Average (33,290.08) tumbled last week, breaking below the crucial support level of 33,500 which was expected to hold. Now, 33,000 will be the next important level to watch.
A break below it can drag the Dow to 32,000 in the coming days.
The Indian rupee fell sharply below 74 and made a low of 74.27. Though it recovered well on Friday to close at 73.8650 in the onshore market, the currency lost steam and fell back again in the offshore market, closing at at 74.14.
As long as the rupee trades below 74, a further fall to 74.50 and even 75 is likely in the coming days. The level of 75 is a strong support from which the rupee can recover again. The price action at 75 will need a close watch. The rupee has to see a sustained break above 74 in order to strengthen back towards 73.50 and higher levels.
The writer is a Chief Research Analyst at Kshitij Consultancy Services