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Global shares edged higher and the dollar held near three-week lows on Wednesday as traders were all but certain that the US Federal Reserve will refrain from hiking interest rates later in the session.
The much-watched US CPI report on Tuesday showed prices barely rose in May, with just a 0.1% increase from the prior month. On an annual basis, consumer prices rose 4%, the smallest in more than two years, slowing from April's 4.9%.
That has crystallised traders' views that the Fed is unlikely to hike rates later on Wednesday. They now see more than a 90% chance of the bank staying put, reported Reuters.
Expecting a pause global stock markets were in an upbeat mood. Europe's pan-regional Stoxx 600 index (.STOXX) was up 0.7% by 1128 GMT. S&P 500 futures and Nasdaq futures were both up 0.2%, setting Wall Street for further gains after U.S. stocks rallied to 14-month highs overnight.
"Having already flagged the possibility of a pause I think it's unlikely that (the Fed) would veer off course at this particular juncture," said Richard McGuire, head of rates strategy at Rabobank in London.
The US dollar dropped 0.2% against major peers, hovering near a three-week low it hit on Tuesday. That supported the euro , which was up 0.1% to $1.0850, hovering just below Tuesday's three-week high of $1.08235.
Market pricing suggests a pause is all but certain, but traders are also bracing for the possibility of a hawkish surprise, with a 60% probability of a 25 basis-point hike priced in by July.
While US inflation dropped more than expected in May, core inflation which strips out volatile prices remains elevated in a headache for the Fed.
"That persistence means that investors still think that today will only mark a skip on rate hikes rather than a pause," said Deutsche Bank strategist Jim Reid.
After hitting the highest since March on Tuesday, two-year Treasury yields were down 2 bps to 4.67%, after reversing some of the drop they posted in earlier London trade.
The benchmark 10-year yield was down similarly after hitting the highest in 2-1/2 weeks on Tuesday.
In the UK, where data showing a rapid pickup in UK wage growth on Tuesday has prompted traders to raise their bets on Bank of England rate hikes, sterling touched a fresh one-month high of $1.26500.
UK government bonds calmed on Wednesday and two-year yields were 5 basis points lower on the day, following Tuesday's sell-off that sent them 25 basis points higher, above levels seen during September's "mini budget" crisis.
German two-year bond yields touched a fresh high since March ahead of Thursday's European Central Bank rates decision.
