With the supply glut from the German state of Saxony now nearly gone, the U.S. Consumer Price Index (CPI) report due on Thursday will be crucial in determining the trajectory of the Bitcoin (BTC) market.
Data due at 12:30 UTC (8:30 EDT) is expected to show that the cost of living in China, the world’s largest economy, rose 0.1% in June from the previous month, after remaining flat in May, to rise 3.1% from a year earlier, according to economists surveyed by Dow Jones. Core CPI, which excludes volatile food and energy prices, is forecast to rise 0.2% from May and 3.4% from June last year.
If the actual figures match expectations, it would confirm continued progress toward the Fed’s 2% inflation target and set the stage for the bank to begin a long-awaited cycle of rate cuts this year.
The growing likelihood of an interest rate cut is likely to bode well for risk assets, including bitcoin, helping the leading cryptocurrency continue its price recovery from its low of around $53,500 hit on July 5. The recovery has stalled, with buyers struggling to gain a foothold above $59,000, according to data from CoinDesk.
“The CPI data will be closely watched and we expect the market to react strongly to the release. Analysts’ optimistic outlook for H2 2024 and 2025 hinges on whether the FOMC cuts interest rates, as lower interest rates typically lead to increased liquidity and investors turning to ‘long tail’ assets like cryptocurrencies,” algorithmic trading firm Wintermute told CoinDesk in an email.
Inflation has slowed dramatically from a high of 9.1% expected in 2022. Still, the Fed has repeatedly stressed in recent months that it needs to see more progress on the inflation front before it stops raising interest rates. On Tuesday, Fed Chairman Jerome Powell said as much in congressional testimony, emphasizing that the Fed is not going to wait to cut rates until inflation has settled at 2%.
Friday’s weak jobs report has traders estimating the likelihood of a Fed rate cut in September at about 70%, according to CME’s FedWatch tool, and also raising the likelihood of another cut in December.
The reaction of the U.S. Treasury yield curve to the expected weak CPI release could impact overall market sentiment, including Bitcoin.
Slowing inflation and rising expectations of interest rate cuts could push up the price of two-year notes and drive down their yields, as investors are willing to pay a premium for higher-yielding securities when they expect rates to fall. Meanwhile, 10-year yields are likely to remain elevated as markets fear a possible Trump presidency would widen the budget deficit. The odds of Republican candidate Donald Trump winning the Nov. 4 election have recently risen.
The net effect will be a bullish steepening of the so-called yield curve, measured by the difference between the yields on 10-year and 2-year Treasury notes. The curve has inverted, with 2-year Treasury notes consistently offering relatively higher yields since mid-2022.
According to the CAIA Association, bull market periods characterized by a rapid normalization of an inverted yield curve have historically occurred during periods of economic contraction and coincided with risk aversion.
“Classical bull market periods include 1990-1992, 2001, 2003, 2008 and 2020, all of which were followed by recessions,” CAIA said in a statement.
“Stocks do not typically perform well in such circumstances and performance during these periods has clearly been below their overall historical averages,” CAIA added.
Noel Acheson, author of the Crypto Is Macro Now newsletter, expressed a similar view in the July 4 edition, stating that “a sharp rally always precedes the onset of an economic downturn.”
Acheson added that the yield curve has been somewhat steeper recently due to lingering political uncertainty in the U.S. “This increases the likelihood of a Trump victory in the near term, which could lead to higher inflation from tariffs and a surge in bond issuance to fund promised tax cuts,” Acheson explained.
Investment banks including JPMorgan and Citi are betting on a steepening yield curve.
