How BTC and ETH may 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 more than 8% in a few hours to hit $53,600 as the now-defunct Mt. Gox began in motion large amounts of BTC to Japan-based exchange bitBank to reimburse customers.

This week, after recovering from the Mt. Gox refund saga and the German government’s BTC liquidation, BTC is now negotiation at $57,084 on July 12, despite a slight 2.3% drop in the last 24 hours.

Meanwhile, ETH have seen a high, trading at US$ 3,150, marking a gain of 1.78% in the same period.

Amidst this, the cryptocurrency market is now on edge, awaiting the next big trigger: the US Consumer Price Index (CPI) data, which will be released today.

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

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

If these numbers are in line with expectations, it would indicate continued progress toward the Federal Reserve’s 2% inflation target, potentially paving the way for this year’s long-awaited rate-cutting cycle.

It’s worth noting that the inflation rate has fallen quite a bit since its 2022 peak of 9.1%, but the Fed remains cautious, needing to see more consistent progress before cutting interest rates.

At the same time, the response of the US Treasury yield curve to the expected soft CPI release could also play a key role in shaping market sentiment, including the cryptocurrency market.

The decline in long-term US Treasury yields I have been a critical factor, and any new twist in this trend could reverberate across financial markets, affecting cryptocurrencies.

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

Market expectations and potential direction of the cryptocurrency market

Earlier this week, Fed Chairman Jerome Powell delivered the Semiannual Monetary Policy Report. In his remarks, Powell suggested that cutting the benchmark interest rate would not be appropriate until there is greater confidence that inflation is moving sustainably toward the 2% target.

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

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

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 increase in unemployment.”

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

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

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

According to the latest data from Statista, the yield on 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 usually turn to riskier assets like BTC or ETH in anticipation of long-term gains.

Treasury Yield Curve | Source: Statist

However, any deviation from expected data could increase volatility. Higher-than-anticipated inflation could dampen hopes of a rate cut, causing a temporary drop in cryptocurrency 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 cryptocurrency analysts have shared their insights on what the future holds for the cryptocurrency market.

An 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 may increase.

Drawing parallels to Bitcoin’s current pattern, the analyst predicts that BTC could soon rise 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 break above the $60,000 mark.

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

Combining these insights, the data suggests a potential upward move, with the $60,000 resistance level acting as a key cap on momentum.

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

Always do thorough research and consider seeking guidance from financial professionals before making any moves in the cryptocurrency market.

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