EUR/USD advances as soft US CPI bolsters Fed rate-cut bets

• The Euro strengthens as softer-than-expected US CPI data weighs on the US Dollar.
• Headline CPI rose 0.3% MoM, below the 0.4% forecast, while core inflation eased to 3.0% YoY.
• Markets price in nearly 99% odds of another Fed rate cut at the October 29-30 meeting, with further easing expected in December.

The Euro (EUR) strengthens against the US Dollar (USD) on Friday after softer-than-expected US inflation data reinforced expectations that the Federal Reserve (Fed) will continue easing monetary policy following its first rate cut in September. At the time of writing, EUR/USD trades around 1.1635, extending gains for the third straight day as the Greenback weakens broadly.

The latest data from the US Bureau of Labor Statistics (BLS) showed that the Consumer Price Index (CPI) rose 0.3% MoM in September, missing the 0.4% forecast and down from August's 0.4%. On an annual basis, headline inflation rose 3.0%, coming in below expectations of 3.1% and slightly above the 2.9% pace recorded in August.

The Core CPI, which excludes food and energy components, also rose 0.2% MoM, below the 0.3% forecast and matching the 0.3% gain recorded in August. On a yearly basis, core inflation rose 3.0%, below the 3.1% forecast and the 3.1% reading seen in the previous month.

The softer inflation report strengthened market conviction that the Fed will stay on its easing path as officials respond to cooling price pressure and a softening labor market. Fed funds futures, tracked by the CME FedWatch tool, now assign a 98.9% probability of a 25-basis-point (bps) interest rate cut at the October 29-30 meeting, with another cut in December almost fully priced in at 98.5%.

The US Dollar Index (DXY) came under pressure after the release, falling below the 99.00 handle as traders pared back their exposure to the Greenback. Meanwhile, US Treasury yields declined across the curve, reflecting growing confidence that the Fed's tightening cycle is nearing its end.

Looking ahead, market participants will turn their attention to the upcoming S&P Global preliminary Purchasing Managers Index (PMI) readings and the University of Michigan (UoM) Consumer Sentiment Index, both due later on Friday. The data will provide fresh insights into the health of the US economy and inflation expectations, offering further clues on the Fed's monetary policy path.