The dollar index witnessed a strong recovery from its low last week. The index touched a low of 107.75 early in the week and rose sharply from there to close the week at 109.65. On Friday, the US jobs data gave the greenback an additional boost to rise.

Strong job numbers

The US added 256,000 jobs to its nonfarm payroll in December. This was much higher than the market expectation for an addition of 155,000 jobs. The unemployment rate fell to 4.1 per cent in December from 4.2 per cent in November.

Strong jobs data strengthened the case for the US Federal Reserve to delay the rate cuts going forward. That took the US Treasury yields sharply higher on Friday and aided the dollar index also to go up. The US 10Yr Treasury yield surged to a high of 4.78 per cent before closing the week at 4.76 per cent.

Inflation watch

Under this backdrop, the US Consumer Price Index (CPI) data to be released on Wednesday is going to be very important. If the data show an uptick, then it will increase the room for the talks about rate hikes rather than rate cuts. That will further push the yields higher and in turn take the dollar index also up.

Resistance ahead

The dollar index (109.65) is coming close to a key resistance at 110.50. We can expect this resistance to hold on its first test. As such a corrective fall from 110.50 to 109-108 is a possibility.

However, after this corrective fall, the uptrend can resume. An eventual break above 110.50 can then take the dollar index up to 112.

From a long-term perspective, we see the upside open for the dollar index to target 118-119 in the next couple of quarters.

Strong downtrend

The euro (EURUSD: 1.0244) continues to fall in line with our expectation. The currency has declined well below the key support level of 1.03. It has room to touch 1.02-1.0140 on the downside in the short term. After this fall, a corrective bounce to 1.0250-1.03 is a possibility.

But from the big picture, we see the euro heading down towards parity in the coming weeks. The currency can fall to 0.98 and even lower in the coming months.

Crucial hurdle

The US 10Yr Treasury yield (4.76 per cent) has a crucial resistance at 4.8 per cent. Failure to breach this hurdle can take it down to 4.65-4.6 per cent in the short term. After this fall, the yield can rise back again towards 4.8 per cent.

On the other hand, if the US 10Yr yield breaks above 4.8 per cent it can surge towards 5 per cent in the coming weeks.

More fall

The Indian Rupee (USDINR: 85.97) fell and closed around a new low of 85.97 last week. Indeed, in the offshore segment the domestic currency has declined below the psychological level of 86. The sharp rise in the US yields and the dollar index after the jobs data release on Friday has triggered this fall. The rupee closed at 86.17 in the offshore segment. That leaves the chances high for a wide gap-down open in the onshore segment on Monday.

The outlook remains bearish for the rupee. Resistance is now at 85.80. Rupee can fall to 86.40-86.50 in the coming weeks. A strong rise above 85.80 is needed to see a recovery towards 85.60-85.50 again. But that looks less likely.

From a big picture, the rupee can fall to 87.20 in the coming months.