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What Will The US CPI Data Do To Cryptocurrencies?

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US Inflation data
US Inflation data

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On Wednesday at 12:30 GMT, the US Consumer Price Index (CPI) inflation data for June is set to be released. If the previous month’s CPI data release is any indicator, this revelation may cause volatility in the cryptocurrency markets.

Traders will remember that a hotter-than-expected May Consumer Price Index report was released in the middle of June at the time, which sparked a crash in the values of stocks, bonds, and cryptocurrencies.

This is due to the fact that the data compelled the United States Federal Reserve to quicken the pace of interest rate rises at its policy meeting in June, increasing the amount by 75 basis points (bps) from the previous meeting’s level of 50 bps (bps).

The minutes from the Federal Reserve’s meeting in June, which were released last week, confirmed that the central bank accelerated the pace of rate hikes due to deterioration in the near-term inflation outlook.

The minutes also revealed that the Central Bank is prepared to implement another rate hike of either 50 or 75 basis points at its upcoming meeting in July. As a result of bond investors pricing in a poorer US economic outlook, long-term US bond prices have now largely gone back to or above their levels in June, prior to the announcement of CPI data that induced a sell-off in the bond market.

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However, stock prices and cryptocurrency have not even come close to recovering to the levels they were at before the CPI data release in June. Indeed, despite growing concerns that the economy of the United States may be headed for recession and money markets that are pricing in a series of Fed rate cuts beginning in the second half of 2023, markets have remained focused on the near-term outlook for Fed policy.

This is despite the fact that money markets are pricing in a series of Fed rate cuts beginning in the second half of 2023. The Consumer Price Index (CPI) data will be released on Wednesday, and analysts anticipate that it will reveal a new multi-decade high in the headline year-on-year increase in prices reaching 8.8%.

As a result of the rise in gas prices, it is anticipated that the headline price index would increase by more than 1% month-over-month for a second consecutive month. If the impending CPI data release does reveal more acceleration of price pressures in the United States, even if it is not nearly as severe as anticipated, that should keep the Fed on path to raise interest rates by an additional 75 basis points later this month.

The Federal Reserve has signaled that it is concerned about a slowdown in the growth rate of the US economy. The ISM Services PMI survey data and the June jobs statistics, which were both solid, will have soothed worries that a recession is approaching.

What Kind Of Impact Does This Have On The Cryptocurrency Market?

A better-than-expected reading on inflation would cause the Federal Reserve to raise its odds of raising interest rates, which, similar to what happened in June, will probably put a lot of pressure on risky assets like stocks and cryptocurrencies.

A Consumer Pricing Index data that mainly prints in line with forecasts would reflect a rise in price pressures and strengthen expectations for near-term tightening by the Federal Reserve.

Although the recent drop in cryptocurrency prices since the previous Friday undoubtedly shows that this is already being priced in to some degree, more price drops shouldn’t be ruled out as a possibility.

A significant negative surprise is probably going to be required to push crypto prices upward. A few weeks after the CPI data saw its core measure fall to a six-month low, the PCE inflation data, an alternate US inflation gauge favored by the Fed, was issued in June.

This was a few weeks after the CPI data had been released. This added to the belief that pricing pressures in the United States could already have reached their peak. Traders will thus be keeping a close eye on the key indicators included in the CPI data that will be released on Wednesday for more signs of so-called peak inflation.

It is anticipated that the year-on-year pace of rises in core prices would reach its lowest point since January, when it stood at 5.7%. In the event that it comes in considerably lower than expected, the markets may start reducing their wagers on the Fed raising interest rates later this year and in 2023.

Breathing Space for Retail Banks

Despite the fact that the data on consumer prices that will be released on Wednesday are likely going to reaffirm expectations for rapid near-term tightening from the Fed, some people are hopeful that the data on retail sales in the United States for the month of June, which is scheduled to be released on Friday, will contain evidence of a cooling of consumer demand.

According to the results of a survey conducted by Reuters of experts, it is anticipated that headline retail sales would increase by 0.8% month on month in June. A decrease in expenditure that is adjusted for inflation of 0.3% is implied if the month-over-month headline inflation comes in at 1.1% as predicted.

After a decline of 1.3% month on month in retail sales when adjusted for inflation in May, this would indicate the second consecutive monthly decline in real expenditure. Inflation is unquestionably having an effect on the consumer in the United States.

This much will be made clear in the preliminary publication of the July University of Michigan Consumer Sentiment survey, which will also take place on Friday. It is anticipated that the poll will show consumer sentiment plunging to a new all-time low.

Many people are of the opinion that the current difficulties faced by US consumers are an early warning sign that the economy may be about to enter a recession in the near future. If the data released this week leads to a significant increase in the number of bets placed on a recession, the market may start reducing the number of bets placed on the Fed raising interest rates in late 2022 or early 2023.

Even if sentiment takes a knock on Wednesday as a result of high CPI statistics, this may provide some relief for cryptocurrency investors. Another event of potential concern to keep an eye on this week is the unofficial beginning of the earnings season in the United States.

During the latter half of the week, a number of large US retail banks will be releasing their statistics for the second quarter. Investors have been concerned about the impact that slowing growth may have on profitability, and as a result, they will be paying particular attention to any new developments.

Any decline in stock prices caused by disappointing earnings might result in a decline in the value of cryptocurrencies.

Bitcoin Is in Danger of Falling Below Key Support

Bitcoin is now trading just above the $20,000 mark and is testing a crucial support trendline that connects the lows from the middle of June, the end of June, and the beginning of July.

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Should this week’s macro developments cause deterioration in crypto sentiment and Bitcoin break below this uptrend, it runs the risk of quickly testing late-June lows in the mid-18,000s and potentially even retesting annual lows in the mid-17,000s. If this occurs, Bitcoin is at risk of swiftly testing annual lows in the mid-17,000s.

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