US Dollar Index sees a pullback towards 107.00 as yields extend recovery

• The DXY is hoping for a pullback towards 107.00 as yields extend gains.
• Odds of a 1% rate hike have trimmed while policy tightening expectations are rock solid.
• Inflation rate is likely to reach its full potential sooner as oil prices have remained vulnerable in July.

The US dollar index (DXY) is displaying a balanced market profile in a narrow range of 106.64-106.75 in the Asian session. The asset has remained in the grip of bears for the past three trading sessions. The DXY has surrendered more than 2.60% after failing to sustain the fresh 19-year high at 109.30 last week. A pullback move is likely to be followed after a vertical downside. Also, the US Treasury yields have extended their recovery.

10-year US Treasury yields stabilize above 3%

A divergence has been observed between the US Treasury yields and the DXY over the past few trading sessions. As the 10-year US Treasury yields have reclaimed the psychological figure of 3%, the DXY will surely display a pullback move after a bearish impulsive wave. The odds of a 100 basis point (bps) rate hike by the Federal Reserve (FED) have trimmed drastically. However, the chances of more policy tightening are rock solid.

Inflation sees its potential sooner

The DXY is expected to continue its downside rush on a broader note as the market participants are expecting that inflation has reached its potential. Oil prices have remained vulnerable in the month of July and lower valued ‘paychecks’ received by the households have forced them to drop their consumption quantity-wise. A slippage in overall demand and oil-driven inflation will result in a lower inflation rate.

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

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