• US inflation, notably slowing, supports dovish feed-cut conditions
• The dollar is stable as the data could be distorted by the US shutdown
• BOE cuts rates, signals slower cuts ahead ECB Pat stands
• Yen Tumbles as traders seek clear clues about Bob’s next moves

US inflation slows more than expected

It traded mixed on Thursday, ending the day virtually unchanged against most of its major peers, even after U.S. data revealed that inflation in the world’s largest economy worsened more than expected in November.

Both headlines and rates fell to 2.7% y/y and 2.6% y/y in September, adding additional credence to investors’ view that the Fed may need to hike more than once in 2026, especially after Tuesday’s jobs report indicated further weakness in the labor market.

However, both the employment and price data sets can be distorted by the US government shutdown, and hence the US dollar has not been severely damaged. Fed funds futures also did not move much. They are still pointing to a 60bps rate cut for 2026, giving January a 25% chance. A total decline of 60 bps translates into two quarter-point cuts and a near 50% chance of a third.

Bowie signal rate cut, ECB confirms bets for further cuts

In Britain, the Bank of England decided by a 5-4 vote as Governor Bailey changed his mind and voted in favor of a rate cut, tipping the voting scale. That said, the quarter-point rate cut achieved at the time of the announcement was almost fully priced in and when the Bank signaled that the easy part of the easing cycle was over. “We still think rates are on a gradual downward trend,” Governor Bailey said.

For 2026, investors are now penciling in about a 36 bps rate cut, a slightly less dovish outlook than the Fed. This means the pound could remain supported against the US dollar for a while, especially if UK growth data starts to point to some economic recovery.

An hour after the Bank of England, it was the European Central Bank’s turn to decide on policy. The ECB kept its policy rates steady on Thursday as widely expected and revised its growth and inflation forecasts upwards, further reassuring the market that the bank’s rate cut has ended. However, officials did not expressly close the door to further rate cuts, saying they could not rule out a move in either direction due to heightened uncertainty.

The result prompted traders to push the possibility of a rate hike until September from about 35 percent ahead of the decision, helping to gain some ground at the time of the announcement, which, however, was later delivered later in the day.

Rates bear weight but the yen falls on little clarity about the next hike

Today, during the Asia session, the central bank torch was passed to the Bank of Japan. Japanese policymakers decided to hit the hike button for the second time this year, after hiking the policy rate to 0.75 percent in January. The move was unanimously endorsed by the bank’s board, with policymakers noting that real interest rates are “significantly negative”, making financial conditions broadly accommodative. Therefore, they signaled readiness to raise interest rates further if the Japanese economy lives up to their expectations.

All that said, the yen came under pressure, climbing above 156.00, despite the hawkish flavor of rate hikes. Perhaps traders wanted a more specific signal about when the bank plans to hit the hike button again. At the press conference, Governor Ida reiterated the bank’s readiness to raise rates further, but how high and how quickly they will move needs to be carefully determined.