The dollar stumbled Wednesday after December's inflation numbers came in cooler than expected, effectively locking in a Federal Reserve pause for January and giving traders the green light to bet on rate cuts arriving sooner rather than later. Core CPI rose just 2.6% year-over-year, down from November's 2.7% and below what analysts anticipated. Headline CPI held steady at 2.7%. Monthly core inflation climbed 0.2%, also missing forecasts.
December's softer inflation data triggered a swift dollar selloff as markets accelerated bets on Fed rate cuts moving from July to June.
The greenback gave up earlier gains almost immediately after the data dropped. Eased core price pressures did their thing, and suddenly traders were repricing Fed expectations. June is now fully baked in for a rate cut, shifted forward from July. There's a laughable 1% chance priced for January, which is basically zero.
Markets loved it. Stock futures jumped higher. Yields dropped at the front end of the curve while long-duration rates crept up. The recovery came after an early sell-off tied to political theater around Fed Chair Powell, who's facing DOJ subpoenas and threats from the incoming Trump Administration. Central bank independence concerns flared up again because apparently we're doing this dance once more. Geopolitical tensions with Iran piled on to the dollar's misery.
Shelter and services continue driving what inflation remains. Rent, lodging, recreation, medical care—all sticky. Goods prices fell, including used cars and furnishings. Gasoline dropped while natural gas spiked. Energy makes up 6% of CPI and posted a 0.2% year-over-year decline overall.
The Fed is expected to cut at least once in 2026, maybe more. The current forecast shows 50 basis points coming off in 2026 and another 75 in 2027, even as inflation is projected to climb back toward 3.5% by the fourth quarter of this year. Tariffs will add a full percentage point to year-over-year growth by then, with effects lingering into mid-2026.
A weakening dollar, tight labor supply, and possible fiscal stimulus ahead of the midterms will keep inflation running above the Fed's 2% target. But apparently that won't stop rate cuts. The shift in monetary policy expectations triggered typical forex market movements as traders repositioned ahead of anticipated changes in interest rate differentials between major currencies. Central bank interventions in currency markets often aim to maintain economic stability when exchange rates move too rapidly in response to policy shifts. Other central banks like SARB closely watch these Fed dynamics as monetary policy decisions from major economies ripple through emerging market currencies and capital flows. December 2025 CPI data drops January 13, 2026.
