The June Consumer Price Index (CPI) data, released today by the Bureau of Labor Statistics, has sent ripples of optimism throughout the Bitcoin and cryptocurrency market. The latest figures reveal a surprising cooldown in inflation, raising hopes for a positive outlook.
According to the data, headline CPI inflation YoY fell to 3.0%, below expectations of 3.1%. This represents a notable decrease from the previous month’s 4.0% figure.
Even more encouraging is the fact that annual core CPI inflation fell to 4.8%, beating market expectations of 5.0%. In particular, this is the first time that the core CPI has fallen below 5.0% since December 2021, leading analysts at The Kobeissi Letter to observation“The 26-month battle against inflation may finally be coming to an end.”
On a monthly basis (m/m), the headline CPI came in at 0.3%, picking up slightly compared to May (+0.1%). Meanwhile, core CPI m/m came in lower than expected, landing at 0.3% instead of 0.4%.
BREAKING: US inflation below expectations #Bitcoin
Headline CPI YoY 3.0% (forecast 3.1%, latest 4.0%)
Headline CPI MoM 0.2% (Forecast 0.3%, Latest 0.1%)
Core CPI YoY 4.8% (forecast 5.0%, latest 5.3%)
Core CPI MoM 0.2% (Forecast 0.3%, Latest 0.4%)
—Jake Simmons (@realJakeSimmons) July 12, 2023
Why CPI Data is Crucial for Bitcoin and Crypto
The Fed has raised interest rates by 5.0 basis points since March 2022 to reduce the highest inflation in the US in four decades. During the June meeting, the Federal Open Market Committee (FOMC) announced a pause for the first time in this cycle to give itself time to assess the still-evolving impact of earlier hikes. Fed Chairman Jerome Powell, as always, stressed the reliance on data.
Prior to the CPI and Core CPI release, the market was expecting a 92% probability (according to the CME Fed Watch Tool) that Fed policymakers would decide in favor of a rate hike. 0.25 basis points at their meeting on July 25 and 26. which would bring the policy rate to the range of 5.25% to 5.50%. Today’s numbers are likely to influence the Fed’s decision. However,
San Francisco Fed President Mary Daly recently told a Brookings Institution event that the Fed “could end up doing less because we have to do less; we may end up doing just that; we may end up doing more. The data will tell us.”
Despite that, 20 minutes after the CPI release, the CME Fed Watch tool was still showing 89% of a 25 basis point gain at the end of July. Renowned journalist Walter Bloomberg, quoting The Economists, said the surprisingly good CPI reading is unlikely to deter the Federal Reserve from raising interest rates by a quarter point later this month. However, he notes that this rate increase could potentially be the last in the current cycle.
In that regard, it’s important to note that the Fed’s inflation job may not be done yet. Despite headline inflation trending downward and fast approaching the 2% target, sticky inflation is still at levels last seen in 1982, as the chart below shows. The sticky consumer price index minus food and energy remains very high, prompting fears of a resurgence of higher headline inflation.
Historical core inflation | Source: Twitter @GameofTrades_
Fed research published two days ago by economist Michael Kiley showed that basic CPI data in 2022 and early 2023 were consistent with models showing the most persistence. “Updated forecasts from these models suggest that core CPI inflation is likely to remain above 3.5% through 2024.” writes Kiley.
BTC price reacts cautiously
At press time, the price of Bitcoin quickly jumped above $31,000 before pulling back below $30,800. True market valuation of the data remains to be seen in the coming hours.
As Daan Analyst explained via Twitter, there is often an initial positive market reaction to positive CPI releases. This rally usually lasts between 5 and 15 minutes, after which it starts rolling. So, the price tends to look for liquidity just below the “data release candle”.
BTC above mid-range resistance, 4-hour chart | Source: BTCUSD on TradingView.com
Featured Image from iStock, Chart from TradingView.com
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