Weak U.S. Inflation Data Supports Rate-Cut Bets (27 - 31 October)

The dollar index slipped to 98.8 on Friday after all major U.S. inflation readings came in below expectations, reinforcing bets on Federal Reserve rate cuts next week and again in December. The delayed CPI report, released after the government shutdown, showed headline inflation at 3.0%, slightly under forecasts, while core inflation eased.

Markets now see a 99% probability of a 25 bps cut. Despite Friday’s decline, the dollar still posted a 0.5% weekly gain ahead of next week’s Trump–Xi trade talks.

Gold stayed below $4,120 per ounce, pressured by a firmer dollar and profit-taking following its sharpest weekly drop in five years. Softer U.S. inflation data strengthened expectations of lower interest rates, but risk appetite limited safe-haven demand. Meanwhile, the U.S. 10-year Treasury yield fell below 4%, its lowest since mid-September, as investors priced in two more rate cuts this year.

The euro climbed above $1.16, buoyed by strong Eurozone PMI data, while the pound slipped to $1.33 after softer UK inflation figures increased bets on early Bank of England rate cuts. The yen weakened toward 153 per dollar, losing around 1.5% for the week, even as Japan’s core inflation rose for the first time since May.

Market Drivers and Catalysts

• Currencies: Dollar dips after soft CPI; euro strengthens on PMI rebound; pound weakens on softer UK inflation; yen declines despite rising prices
• Commodities: Gold retreats after nine-week rally; silver slides on profit-taking; oil rises on U.S. sanctions against Russian producers
• Fixed Income: U.S. yields drop below 4% on weak inflation; gilt yields fall on BoE cut expectations; Bund yields climb on strong Eurozone PMI; JGBs steady ahead of BoJ meeting
• Macro events: U.S. CPI, U.S. Services PMI, UK CPI, China GDP, Japan CPI
• Macro headlines: Fed rate cut bets firm; Trump–Xi trade talks next week; Russia sanctioned by U.S. and EU; Japan mulls new stimulus package

Fixed Income

• United States: The 10-year Treasury yield fell below 4% after softer CPI data fueled expectations of another Fed rate cut this year. The report which was delayed by the government shutdown, showed both headline and core inflation rising less than expected. Yields declined across maturities as renewed U.S.–China trade tensions, banking-sector weakness, and fiscal uncertainty dampened growth sentiment.
• United Kingdom: The 10-year gilt yield dropped to 4.4%, its lowest since mid-December, after UK inflation came in below forecasts. Headline CPI held at 3.8%, while core inflation eased to 3.5%, increasing expectations that the BoE could begin cutting rates in February. The softer data relieved pressure on policymakers and offered fiscal breathing room ahead of the November budget.
• Japan: The 10-year JGB yield stayed near 1.66%, little changed despite an uptick in core inflation to 2.9% in September, which is the first rise since May. Higher electricity prices drove the increase, while rice inflation eased. The BoJ is expected to keep rates unchanged next week, though speculation is mounting that Prime Minister Takaichi could unveil a new stimulus package exceeding last year’s ¥13.9 trillion plan.
• Germany: The 10-year Bund yield climbed above 2.60%, its highest since mid-October, after Eurozone PMI data showed the fastest growth since May 2024, led by a services recovery and robust German output. The move reflected growing confidence in regional activity, offsetting softer U.S. inflation data that reinforced global rate-cut expectations.

Commodities

Gold hovered below $4,120 per ounce after the U.S. CPI report showed cooler inflation, reinforcing expectations of Fed rate cuts but limiting safe-haven flows. The metal ended its nine-week winning streak, down more than 5%, its steepest drop since 2020. Despite the correction, gold remains up 55% year-to-date, supported by ongoing trade tensions, geopolitical risks, and next week’s Trump–Xi summit.

Silver traded near $48.70, down 0.5% on Friday and poised for a 6% weekly loss as investors locked in profits after recent record highs. The weaker U.S. CPI report supported rate-cut hopes but weighed on industrial demand sentiment. Despite the correction, silver remains supported by tight inventories and resilient safe-haven demand.

Currencies

• Dollar: The dollar index fell to 98.8 after softer inflation data reinforced market expectations for two Fed rate cuts, one next week and another in December. The delayed CPI report confirmed cooling price pressures, while traders monitored progress on Trump–Xi trade talks. Despite Friday’s weakness, the dollar gained 0.5% for the week.
• Euro: The euro held firm above $1.16, lifted by strong Eurozone PMI data showing the region’s fastest expansion since mid-2024. The German services sector reached a 29-month high, offsetting ongoing weakness in France. Softer U.S. inflation supported the euro further, with markets seeing the ECB holding rates steady until mid-2026.
• Pound: The pound slipped toward $1.33, pressured by softer inflation and renewed expectations of early BoE easing. Headline CPI held at 3.8%, while core inflation slowed to 3.5%. The weaker data provided fiscal relief ahead of Chancellor Rachel Reeves’s November budget, but underscored a cooling labor market and rising pressure to support growth.
• Yen: The yen depreciated to 153 per dollar, losing roughly 1.5% for the week, as the BoJ signaled no imminent rate change ahead of next week’s policy meeting. Despite rising inflation, yield differentials and expectations of continued fiscal stimulus under Prime Minister Takaichi weighed heavily on the currency.

Macro Calendar Highlights

• U.S. CPI (YoY, September)
• U.S. Services PMI (October)
• UK CPI (YoY, September)
• China GDP (Q3 2025)
• Japan CPI (YoY, September)
• U.S. Existing Home Sales (September)