Bitcoin
Bitcoin Awaits Guidance from US Inflation Data and Bond Market
With the oversupply from the state of Saxony in Germany almost cleanThe release of the US consumer price index (CPI) report on Thursday will be key in determining bitcoin (BTC) market trajectory.
Data due at 12:30 UTC (8:30 ET) is expected to show the cost of living in the world’s largest economy rose 0.1% month-over-month in June after remaining flat in May, leading to a 3.1% year-over-year increase, according to economists surveyed by Dow Jones. Core CPI, which excludes more volatile food and energy prices, is expected to have increased 0.2% from May and 3.4% since June last year.
If the actual number matches estimates, it would confirm continued progress toward the Federal Reserve’s 2% inflation target and set the stage for the bank to begin its long-awaited rate-cutting cycle this year.
Increased prospects of rate cuts will likely bode well for risk assets including bitcoin, helping the leading cryptocurrency extend its price recovery from July 5 lows around $53,500. CoinDesk Data show the recovery has stalled, with buyers struggling to establish themselves above the $59,000 mark.
“CPI data will be closely watched, with markets expected to react significantly to this release. Analysts’ bullish outlook for late 2024 and 2025 is contingent on the FOMC cutting policy rates, as lower rates typically increase liquidity, driving investors into ‘longer tail’ assets like cryptocurrencies,” algorithmic trading firm Wintermute told CoinDesk in an email.
Inflation has slowed sharply from a high of 9.1% in 2022. Still, in recent months, the Fed has reiterated the need to see more progress on the inflation front before pulling the plug on high interest rates. On Tuesday, Fed Chief Jerome Powell said as much in his testimony to Congress, while also emphasizing that the bank will not wait for inflation to cool to 2% to cut rates.
According to CME’s FedWatch tool, since Friday’s weak payrolls report, traders have priced in about a 70% chance of a Fed rate cut in September and see an increasing likelihood of another cut in December.
The response of the US Treasury yield curve to the expected soft CPI release could influence broader market sentiment, including bitcoin.
Slower inflation and bigger rate-cut bets could boost prices on the two-year note, sending its yield lower. That’s because when investors anticipate lower interest rates, they are willing to pay a premium for a bond with a higher yield in the present. Meanwhile, the yield on the 10-year note is likely to remain elevated as markets fear larger budget deficits under a potential Trump presidency. Republican candidate Donald Trump’s chances of winning the November 4 election have recently increased.
The net effect will be the so-called bull’s inclination of the yield curve, represented by the spread between the yields on the 10-year and 2-year notes. The curve has been inverted, with 2-year notes consistently offering a relatively higher yield since mid-2022.
According to the CAIA Association, periods of sharp increases, characterizing a rapid normalization of an inverted yield curve, have historically occurred during periods of economic contraction and coincided with risk aversion.
“The typical periods of growth were: 1990-1992, 2001, 2003, 2008 and 2020, and all were recessive periods.” CAIA said in an explainer.
“Stocks typically do not fare well during this type of regime, and their performance during these periods clearly lags behind the overall historical average,” CAIA added.
Noelle Acheson, author of the Crypto Is Macro Now newsletter, made a similar observation in the July 4 edition, saying, “a sharp incline has always preceded the onset of a recession.”
Acheson added that the curve has steepened somewhat recently due to persistent political uncertainty in the U.S. “This also makes a Trump victory more likely in the interim, which implies a possible spike in inflation driven by tariffs and a flood of issuance to finance promised tax cuts,” Acheson explained.
Investment banks like JPMorgan and Citi are betting on the slope of the yield curve.