Markets
Bitcoin Awaits Directions from US Inflation Data and Bond Market
With the German state of Saxony’s oversupply almost erasedThursday’s release of the US Consumer Price Index (CPI) report will be key in determining the value of bitcoin (BTC) market trajectory.
Data due at 12:30 UTC (8:30 a.m. ET) is expected to show that the cost of living in the world’s largest economy rose 0.1% month-on-month in June after remaining unchanged in May, leading to a 3.1% year-on-year increase, according to economists polled by Dow Jones. Core CPI, which excludes the more volatile prices of food and energy, is forecast to have risen 0.2% from May and 3.4% from June last year.
If the actual figure matches estimates, it would confirm continued progress toward the Federal Reserve’s (Fed) 2% inflation target and set the stage for the bank to begin its long-awaited round of rate cuts this year.
The increased prospect of rate cuts will likely bode well for risk assets including Bitcoin, helping the leading cryptocurrency extend its price recovery from its July 5 lows around $53,500. Data from CoinDesk show that the recovery has stalled and that buyers are having difficulty settling above the $59,000 mark.
“The CPI data will be closely watched, with markets expected to react significantly to this release. Analysts’ optimistic outlook for late 2024 and 2025 hinges on the FOMC cutting its key rates, as lower rates typically boost liquidity, pushing investors into ‘longer tail’ assets like cryptocurrencies,” algorithmic trading firm Wintermute told CoinDesk in an email.
The inflation rate has slowed sharply from a high of 9.1% in 2022. However, in recent months, the Fed has reiterated that it needs to see more progress on the inflation front before pulling the plug on high interest rates. Fed Chief Jerome Powell said as much in his testimony to Congress on Tuesday, stressing that the bank will not wait for inflation to cool to 2% before cutting rates.
Following Friday’s weak payrolls report, traders have estimated a roughly 70% chance of a Fed rate cut in September, and are seeing an increasing likelihood of another cut in December, according to CME’s FedWatch tool.
The response of the U.S. Treasury yield curve to the expected release of the Consumer Price Index (CPI) could impact broader market sentiment, including Bitcoin.
Slower inflation and increased bets of rate cuts could push up prices for the two-year note, pushing down its yield. That’s because when investors anticipate lower interest rates, they’re willing to pay a premium for a higher-yielding bond in the present. Meanwhile, the yield on the 10-year note will likely remain elevated as markets they fear bigger budget deficits under a potential Trump presidency. Republican nominee Donald Trump’s odds of winning the November 4 election have recently increased.
The net effect will be the so-called bull’s tilt of the yield curve, represented by the spread between the yields of 10-year and two-year notes. The curve has been inverted, with two-year notes consistently offering a relatively higher yield since mid-2022.
According to the CAIA Association, periods of sharp upside, which characterize a rapid normalization of an inverted yield curve, have historically occurred during periods of economic contraction and have coincided with risk aversion.
“The typical bull periods have been: 1990-1992, 2001, 2003, 2008 and 2020, and all of them have been recession periods,” CAIA said in an explanation.
“Equities typically do not fare well in this type of regime and their performance during these periods is clearly below 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 that “the start of a recession has always been preceded by a sharp rally.”
Acheson added that the curve has recently steepened a bit due to ongoing political uncertainty in the United States. “This also makes a Trump victory more likely in the interim, which implies a possible surge in inflation from tariffs and a surge in issuance to finance the promised tax cuts,” Acheson said.
Investment banks like JPMorgan and Citi they are betting on the steepening of the yield curve.