The US Consumer Price Index (CPI) inflation figures, which were higher than expected, had little effect on the sentiment in the crypto market on Thursday. Bitcoin (BTC) was trading just below $26,700, slightly above its 50-Day Moving Average (DMA), which seems to be providing support for now. However, BTC still exhibited a negative bias, down approximately 0.7% for the day.
The world’s largest cryptocurrency continues to trade with a negative bias after breaking the short-term uptrend that it had been following since mid-September. The latest CPI report revealed that headline inflation stood at 0.4% Month-on-Month (MoM) and 3.7% Year-over-Year (YoY), both 0.1% higher than what economists had predicted. Core CPI, which the US Federal Reserve closely monitors to gauge underlying price pressures in the US economy, met expectations at 0.3% MoM and 4.1% YoY.
The market’s muted reaction could be attributed to the fact that the higher-than-expected headline reading was driven by a surprise surge in rental costs. Economists anticipate a decline in rental costs in the upcoming months, as independent surveys indicate falling rental expenses ahead of the CPI. The core inflation rate of 0.3% MoM and 4.1% YoY indicates that the Fed still has work to do in achieving its 2% inflation goal.
However, with interest rates at multi-decade highs of 5.25-5.5%, more than 1% above inflation, the Fed must exercise caution regarding further tightening. It may have already implemented sufficient measures. This is further reiterated by the fact that mortgage rates are at 23-year highs and credit card borrowing costs are at their all-time peak, as highlighted by ING.
The market pricing around the possibility of a rate hike by December has increased marginally, but we doubt it will happen. Fed officials have been emphasizing the importance of the increase in Treasury yields as a factor that will tighten financial conditions and reduce the need for another rate hike. – ING
The US 10-year yield, which recently reached multi-decade highs near 4.90%, experienced a 15 basis points (bps) increase on Thursday, indicating a tightening of financial conditions. The money market implied odds of another 25 bps rate hike from the Fed this year stood at around 31%, a 5% increase compared to Wednesday, according to the CME’s Fed Watch Tool.
It remains uncertain whether the US Federal Reserve will implement additional interest rate hikes. However, what is more certain is that the end of the Fed’s tightening cycle is nearing. At its last meeting, the Fed projected two interest rate cuts in 2024, indicating a shift towards easing financial conditions rather than tightening.
Traders who have been involved in the crypto market for a few years may recall a similar situation in 2019. In early 2019, the Fed announced a pause in interest rate hikes after reaching around 2.5%. As a result, Bitcoin experienced a four-fold increase between February and June 2019, with other cryptocurrencies also rallying. While history may not repeat itself exactly, the macro outlook suggests that crypto may benefit from favorable conditions next year.
Additional bullish catalysts such as the upcoming Bitcoin halving and the potential approval of several spot Bitcoin ETFs in the US could further add to the optimistic narrative surrounding cryptocurrencies.
