US Dollar Index extends pullback above 107.50 despite hawkish Fed bets trim

• The DXY has extended its recovery above 107.50 despite long-run inflation expectations having declined.
• Vulnerable oil prices in July and higher real income shocks may trim the inflation rate.
• A light economic calendar this week will keep the DXY on the sidelines.

The US dollar index (DXY) has given an upside break of the consolidation formed in a narrow range of 107.37-107.46. The DXY is aiming higher and may find resistance near the round-level resistance of 108.00. Earlier, the asset witnessed a steep fall after printing a fresh 19-year high of 109.30 last week. The DXY slipped heavily as the odds of a 100 basis point (bps) interest rate hike by the Federal Reserve (Fed) for its July monetary policy meeting trimmed.

Long-run inflation expectations trim

On Friday, the long-run inflation expectation component of the survey declined to 2.8% vs. 3.1% recorded in June's final print. Post the data, the probability of a 100 basis points rate hike in July dropped below 30% from nearly 90% earlier in the week.

Lower oil prices and large real income shock to reduce the inflation rate

Investors are expecting that the price pressures in the US economy are near their peak levels. The consensus is backed by vulnerable oil prices in July and likely lower aggregate demand. Expectations for slippage in the overall demand will shift the raw-material prices lower and therefore, result in a sigh of relief for the inflation rate.

Key data this week: Housing Starts, Initial Jobless Claims, S&P Global Purchase Managers Index (PMI).

Major events this week: Reserve Bank of Australia (RBA) minutes, People’s Bank of China (PBOC) monetary policy, European Central Bank (ECB) interest rate decision, and Bank of Japan (BOC) monetary policy.