THE DOLLAR INDEX
The Dollar Index concluded the week at 106.41, below the 9-day EMA of 107.50 and the 14-day EMA of 107.18. Both the RSI and stochastics indicate potential for further correction, which is corroborated by candlestick patterns. Fxmethods anticipates that the Dollar Index will continue its correction, initially targeting the 106.09 level, followed by 104.20.
USDINR
Despite the pressure from Foreign Institutional Investor (FII) outflows, the USDINR pair has managed to maintain its position at the 86.60-86.70 range, supported by the RBI. However, the pair is still trading above the 9-day EMA (86.39) and the 14-day EMA (86.015). Despite a correction in the dollar index, USDINR is exhibiting negative momentum.
Fxmethods analysis indicates that USDINR is primed for a 'buy on dip' strategy up to 86.39, after which the approach will shift. We advise importers to purchase ATM call options at 86.75 for a 1-2 month position. Exporters are encouraged to cover positions incrementally with every 25 to 35 pip movement.
THE STERLING
The sterling reached a two-month high following data indicating a significant increase in UK consumer spending in January. This spending surge coincided with a report that British companies are rapidly reducing their workforce. Despite a slight decrease in the UK S&P Composite Purchasing Managers' Index (PMI) for February, the pound demonstrated resilience, appreciating slightly. Since the beginning of the year, the pound has gradually strengthened, rising by 1.2%, although it remains towards the lower end among G10 currencies. In 2024, it was the top-performing major currency against the dollar. However, strategists advised caution, suggesting that the current levels might be overstretched given the pound's recent appreciation since mid-January.
THE YEN
The yen carry trade thrives on Japan's low interest rates, making the yen an attractive funding currency. However, rising inflation and wage growth in Japan, along with potential policy changes by the Bank of Japan (BoJ), are causing investors to reassess the yen's role. If the BoJ tightens policies due to inflation, it could alter global forex dynamics. The carry trade's success is cyclical, influenced by global monetary policies and risk sentiment, as seen during the 2008 financial crisis when a drop in risk appetite led to yen appreciation. Current macroeconomic factors, including Japan's recovery and inflation above the BoJ's 2% target, are reshaping the carry trade landscape.
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