USD weakens as softer CPI boosts Fed rate cut expectations

The US Dollar Index dropped 0.8% following the release of softer-than-expected US Consumer Price Index data, with major currency pairs seeing significant movements. US CPI came in below forecasts, reigniting market expectations for Federal Reserve rate cuts in 2025. EUR/USD surged 0.9% to 1.0950, while GBP/USD gained 0.7% to 1.2230. USD/JPY retreated 1.2% to 149.50 as the yen strengthened on risk-off sentiment. The softer inflation reading has shifted market pricing to a 65% probability of a 25-basis-point Fed rate cut by March 2025, up from 40% before the data release. Technical indicators suggest further dollar weakness possible, with the DXY approaching key support at 104.20. Traders should monitor upcoming Fed speakers for any pushback against dovish market interpretation, while the path of least resistance appears lower for the dollar in the near term.