Flat U.S. CPI in July Triggers Market Rethink: Bond Yields Drop, Dollar Sinks, and Rate Cut Bets Soar

Introduction: A Turning Point in U.S. Monetary Policy?

The July 2025 Consumer Price Index (CPI) report has delivered a powerful signal to global markets: inflation is softening faster than expected, and the Federal Reserve could be nearing a major policy pivot. Released this morning, the data showed that U.S. inflation was flat month-over-month—defying expectations of a modest uptick—while core inflation rose only slightly.

The bond market reacted with force. Treasury yields fell sharply, the U.S. dollar suffered its largest daily drop in over a year, and traders rapidly repriced expectations for interest rate cuts. U.S. equities and crypto markets surged on the back of this inflation reprieve, suggesting that investors view today’s CPI as a potential inflection point for U.S. monetary policy.

Inflation Data: Disinflation Takes Hold

The headline CPI reading for July came in at 0.0%, compared to the consensus forecast of +0.1%, while core CPI (excluding food and energy) rose +0.2%, also below the forecast of +0.3%. On a year-over-year basis:

Headline CPI: +2.7% (down from 2.9% in June)
Core CPI: +3.6% (down from 3.9% in June)

Key sectoral movements:

Energy prices declined slightly (-0.4%), keeping headline inflation anchored.
Food prices remained flat.
Shelter costs, a major driver of core inflation, increased but at a slower pace than in previous months.
Medical services and apparel showed minor increases, but not enough to offset broader disinflation.

The data confirms that the disinflation trend is gaining traction, and suggests that tight monetary policy is successfully cooling consumer price pressures.

Bond Markets Rally: Treasuries Surge as Yields Drop Sharply

Treasury markets responded with a wave of buying. The cooler inflation data reaffirmed that the Fed may no longer need to keep rates elevated deep into 2026.

The 10-year Treasury yield dropped by 20 basis points, closing at 3.82%, its lowest in nearly 3 months.
The 2-year yield—most sensitive to Fed outlook—fell to 3.95%, dropping below 4.00% for the first time since April.
Fed Funds Futures now imply:
- 70% chance of a rate cut by March 2026
- Full 100 bps of cuts priced in by the end of 2026

Bond traders now expect a pivot in monetary policy, reversing the “higher-for-longer” narrative that had dominated markets since late 2023.

U.S. Dollar Plummets: Broad-Based FX Reversal

The U.S. dollar came under immense pressure, with the Dollar Index (DXY) plunging 1.4%, marking its sharpest one-day decline since June 2024. The greenback weakened across all major currency pairs:

EUR/USD surged to 1.1340, its highest level since January 2024
GBP/USD hit 1.3085, bolstered by dovish divergence from the Fed
AUD/USD and NZD/USD also gained sharply, reflecting improved risk sentiment

The dollar’s reversal is directly linked to the repricing of U.S. rate expectations, making it less attractive relative to other currencies where central banks are still hawkish or neutral.

Equity Markets Cheer Soft CPI: Risk-On Sentiment Returns

U.S. equity indices rallied as investors saw renewed optimism in a “Goldilocks” scenario: inflation cooling without tipping into recession.

S&P 500: +1.2%
Nasdaq Composite: +1.8%
Dow Jones Industrial Average: +0.9%

Growth stocks led the charge as lower yields boost future cash flow valuations. Mega-cap tech, fintechs, and AI-related names saw strong inflows. Market breadth also improved, with small-caps and cyclicals catching a bid.

Investor sentiment indicators like the VIX volatility index dropped to 12.8, indicating reduced concern over near-term market stress.

Crypto Reacts Sharply: Bitcoin and Ethereum Rally on Dollar Weakness

The crypto market surged alongside traditional risk assets:

Bitcoin (BTC) jumped to $114,400, up 3.2% on the day
Ethereum (ETH) gained 4.5%, trading near $6,340
Altcoins like Solana, Chainlink, and Avalanche posted double-digit intraday moves

Lower yields and a weaker dollar historically benefit crypto, as they restore risk appetite and reduce opportunity cost. Institutional buying also picked up following the CPI release, according to on-chain activity and derivatives flows.

Rate Cut Debate: A March Pivot Gaining Credibility

Fed officials have remained cautious in recent months, but today’s data gives doves on the FOMC greater justification to push for easing.

While Chair Powell hasn’t signaled any immediate shift, analysts now believe:

The Fed’s tightening cycle is over.
Inflation is headed back to target faster than expected.
A March 2026 rate cut is now plausible—even sooner if job market weakness emerges.

Economists at major investment banks like Goldman Sachs and Barclays are now revising their policy outlooks to reflect at least two rate cuts in 2026, beginning in Q1.

Conclusion: A Policy Pivot In Sight

The July CPI report has catalyzed a fundamental repricing of the Fed’s policy path. With inflation easing, bond yields tumbling, and the dollar weakening, markets are increasingly confident that the next move by the Fed will be a rate cut—not a hike.

This shift not only boosts short-term sentiment, but it also lays the foundation for a potential multi-asset rally as liquidity expectations shift. Whether the Fed confirms this narrative at its next meeting remains to be seen—but for now, investors are firmly back in risk-on mode.