Inflation numbers to sway crypto: How BTC and ETH could react

Will the release of US CPI data signal a new era of monetary easing, and how could this influence Bitcoin and Ethereum investments?

Bitcoin (BTC) and Ethereum (ETH) have been on a wild ride lately. Last week, BTC dropped over 8% within hours, hitting $53,600, as the defunct Mt. Gox started moving large amounts of BTC to the Japan-based bitBank exchange to refund customers. 

This week, after recovering from the Mt. Gox repayment saga and the German government’s BTC sell-off, BTC is now trading at $57,084 as of July 12, despite a slight 2.3% dip in the past 24 hours. 

Meanwhile, ETH has seen a rise, trading at $3,150, marking a 1.78% gain in the same period.

Amid this, the crypto market is now on edge, awaiting the next major trigger: the US Consumer Price Index (CPI) data, set to be released today. 

This data is crucial as it reflects the cost of living in the world’s largest economy. Data by Dow Jones predicts a 0.1% month-over-month increase in June, after May showed no change, leading to a 3.1% year-over-year rise. 

Meanwhile, the core CPI, which excludes volatile food and energy prices, is expected to rise by 0.2% from June and 3.4% since the start of the year.

If these figures align with expectations, it would indicate continued progress toward the Federal Reserve’s (Fed) 2% inflation target, potentially paving the way for the much-anticipated rate cut cycle this year. 

It’s worth noting that the inflation rate has largely dropped from its peak of 9.1% in 2022, but the Fed remains cautious, needing to see more consistent progress before reducing interest rates.

Simultaneously, the response of the U.S. Treasury yield curve to the expected soft CPI release could also play a key role in shaping market sentiment, including the crypto market. 

Declining long-term U.S. Treasury bond yields have been a critical factor, and any new twist in this trend could ripple through financial markets, affecting cryptocurrencies.

With all these developments, let’s dive deeper into what the market is expecting, what experts are hoping for, and how the crypto market might react to these triggers.

Market expectations and potential crypto market direction

Earlier this week, Fed Chairman Jerome Powell delivered the Semi-Annual Monetary Policy Report. In his remarks, Powell suggested that cutting the policy rate wouldn’t be appropriate until there’s greater confidence that inflation is sustainably heading towards the 2% target. 

He also noted a cooling in recent labor market data. Despite these insights, Powell’s comments didn’t alter market expectations for a potential Fed rate cut in September.

Meanwhile, at the Australian Conference of Economists 2024, US Federal Reserve Governor Lisa Cook discussed the monetary policy response to the pandemic and the current inflation scenario. Cook highlighted that the data supports potential rate cuts by the Fed, aligning with other central banks’ approaches. 

She noted, “My baseline forecast (and that of many outside observers) is that inflation will continue to move toward target over time, without much further rise in unemployment.”

Amid this backdrop, the CME FedWatch tool shows an 84% probability of a 25 basis points (bps) rate cut on September 18, with another rate cut expected in December, in line with market expectations of a decline in CPI inflation data.

So, what does this mean for the crypto markets? The potential for rate cuts generally favors risk assets, including crypto. Lower interest rates make borrowing cheaper, prompting investors to seek higher returns in riskier assets.

For example, if CPI data confirms continued inflation decline, it could boost confidence in Fed monetary easing. This might increase demand for BTC and other cryptos as investors seek assets offering better returns than traditional savings accounts or low-yield bonds.

According to the latest Statista data, the yield for a ten-year US government bond was 4.2%, while a two-year bond yielded 4.67%, indicating an inverted yield curve where longer-maturity bonds offer lower yields. In such scenarios, investors often turn to riskier assets like BTC or ETH, anticipating long-term gains.

However, any deviation from expected data could heighten volatility. Higher-than-anticipated inflation might dampen hopes for a rate cut, causing a temporary dip in crypto prices as investors reassess their strategies.

What to expect in the coming days?

As the market eagerly awaits the latest US CPI data, two prominent crypto analysts have shared their insights on what lies ahead for the crypto market. 

One analyst tweeted about Bitcoin and the Wyckoff Reaccumulation Model, referencing a chart shared a week ago. This technical analysis framework suggests that after a consolidation phase, an asset’s price could surge. 

Drawing parallels with Bitcoin’s current pattern, the analyst predicts BTC could soon climb back above $60,000.

Meanwhile, Michaël van de Poppe, another well-known crypto analyst, noted that Bitcoin recently broke above a crucial resistance level. However, he suggested that for BTC to gain momentum, it must surpass the $60,000 mark.

Van de Poppe also highlighted the upcoming CPI data as a critical market mover, suggesting its release could heavily influence Bitcoin’s price action.

Combining these insights, data suggests potential upward movement, with the $60,000 resistance level acting as a key threshold for momentum. 

It’s crucial to closely monitor the CPI data release. If the data indicates continued progress towards the Fed’s inflation target, it could enhance confidence in a potential rate cut, positively impacting risk assets like BTC.

Always conduct thorough research and consider seeking advice from financial professionals before making any moves in the crypto market.