On February 24th, 2023, the U.S. Dollar Index (DXY) experienced a surge, rising from a low of 104.42 to a high of 105.32.  This surge was largely due to the release of the Core Personal Consumption Expenditure (PCE) Price Index data from the US, which showed that inflation rose at a stronger pace than expected in January. This led to a USD rally and weighed on the Euro and other major currencies. Additionally, the Federal Reserve had been increasing interest rates in an effort to tame inflation, which further contributed to the surge in the DXY.

A look at the US Dollar Index (DXY) Weekly Chart shows that it took out a major double-top resistance as it move above 105-50 – 106.00 levels in July last year. The surge was strong; it saw DXY testing the highs near 114.75 in September 2022. Though that rise had come with a bearish divergence of the RSI against the price, the quantum of the surge was significant; it was almost to the tune of 8.75%.

However, the retracement that followed was even larger; DXY tested the levels of 100.68 in January this year. The recent surge has seen the Dollar Index halting just below the 50-Week MA of 105.35. This makes the zone of 105.35-106 a potential resistance area for DXY.

On the Daily chart as well, the DXY saw a sharp retracement after it fell off from a declining channel that was created between September and November 2022. The recent pullback has seen DXY penetrating and breaking above the falling trend line pattern resistance; this trend line begins from 107.80 and joins the subsequent lower tops. 

However, again, going ahead, it has a resistance to face where 100-Day MA and 200-Day MA are very near to each other. They are placed at 106.17 and 106.32 respectively.

Reading these levels along with the resistance levels seen on weekly charts, the zone of 105.35 to 106.50 can be described as a strong resistance area for DXY.

This brings us to USDINR. This pair, i.e., the Indian currency has been trading at crucial levels over the past quarter.

USDINR made a high of 83.26 in October 2022; since then it has been trading in a defined range. However, the price action from November 2022 to date has resulted in the development of an ascending triangle. Nevertheless, USDINR has a strong resistance area between current levels and 83.26.

The current setup can be interpreted in two ways. On a plain reading, if the strength in the Dollar Index (DXY) persists, we have a valid case of USDINR depreciating more in form of an attempted breakout from this ascending triangle formation.

In the other reading, while keeping the above observation in context, the pair is also likely to find a strong resistance between the 82.80-83.27 range. This possibility also cannot be ruled out if the DXY halts its rally near the above-mentioned resistance zone of 105.35-106.50. The strong Relative Strength of INR against the USD has started to give up; the RS line has reversed its trend and it has slipped below the 50-Day MA.

CONCLUSION: The interpretation is pretty straightforward in the present technical setup. While respecting the levels seen on the charts, any move above 83 in the USDINR pair is likely to see the Indian currency depreciating in the near term. This may lead the pair to test 83.25 and 83.85 levels over the near term.

However, to have this reading triggered, observing the behavior of the USDINR pair against the levels of 83 will be crucial.

Foram Chheda, CMT