Bitcoin Market Analysis
With the supply overhang from Germany’s Saxony state nearly cleared, Thursday’s release of the U.S. consumer price index (CPI) report will be pivotal in determining the bitcoin (BTC) market’s trajectory.
The 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% rise year over year. The core CPI, which strips out more volatile food and energy prices, is forecast to have increased 0.2% from May and 3.4% since 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 the much-anticipated rate cut 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 the July 5 lows of around $53,500.
Analysts are optimistic about the late 2024 and 2025 outlook, which hinges on the FOMC reducing policy rates. Lower rates typically increase liquidity, driving investors towards ‘longer-tail’ assets like cryptocurrencies.
The inflation rate has slowed dramatically from the high of 9.1% in 2022. The Fed has reiterated the need to see further progress on the inflation front before cutting rates. Fed chief Jerome Powell stated the bank won’t wait for inflation to cool to 2% to cut rates, indicating a proactive stance.
Traders have priced about a 70% chance of a Fed rate cut in September since the weak payrolls report. There’s a rising probability of another cut in December, according to the CME’s FedWatch tool.
Focus on Bonds
The U.S. Treasury yield curve’s response to the expected soft CPI release might influence the broader market sentiment, including bitcoin. Slower inflation and increased rate cut bets can boost prices for the two-year note, sending its yield lower.
The yield on the 10-year note will likely stay elevated as markets fear bigger budget deficits under the potential Trump presidency. Republican candidate Donald Trump’s odds of winning the Nov. 4 elections have recently increased.
The net effect will be a so-called bull steepening of the yield curve, represented by the spread between yields on the 10- and two-year notes. The curve has been inverted, with two-year notes consistently offering a relatively higher yield since mid-2022.
Periods of bull steepening have historically occurred during economic contractions and risk aversion. Equities typically do not fare well during this type of regime. Investment banks like JPMorgan and Citi are betting on the steepening of the yield curve.