Bitcoin falls below $56,000 as Fed rate cut expectations coolBitcoin (BTC) and the broader cryptocurrency market declined in early trading on Wednesday, a move that coincided with diminished expectations for a Fed rate cut following the release of the August Consumer Price Index (CPI) report. The report showed that overall inflation rose at its slowest pace in more than three years in August, but it did not increase market expectations for a significant rate cut from the Fed
Bitcoin falls below $56,000 as Fed rate cut expectations cool
Bitcoin (BTC) and the broader cryptocurrency market declined in early trading on Wednesday, a move that coincided with diminished expectations for a Fed rate cut following the release of the August Consumer Price Index (CPI) report. The report showed that overall inflation rose at its slowest pace in more than three years in August, but it did not increase market expectations for a significant rate cut from the Fed.
Data from the U.S. Bureau of Labor Statistics showed that the CPI rose 2.5% year-over-year in August, in line with expectations and down from 2.9% in July. This was the lowest annual increase since early 2021. Month-over-month (m/m), prices rose 0.2%, unchanged from July, while core prices increased 0.3% in August, up 3.2% in the 12 months.
Market watchers had hoped that the CPI reading would boost the probability of a 50 basis point rate cut from the Fed next week, but after the core inflation reading came in higher than expected, Wall Street is now leaning toward a 25 basis point cut. The CME FedWatch tool now puts the probability of a 50 basis point cut at 15%, down from 44% last week.
This development sent Bitcoin prices lower, as hopes of easier access to capital had propelled the top cryptocurrency higher on Tuesday. But with the market now expecting a 25 basis point cut next week, many analysts said the expectation was already priced in, and traders looking for potential gains exited their positions following the CPI release, leading to a selloff in Bitcoin to below $56,000.
Despite this, the pullback is expected to be temporary as the economy is on a path toward rate cuts. Wall Street is projecting at least three rate cuts in 2024, totaling at least 75 basis points.
"As annual inflation cools as expected, we could see a rebound in investor risk appetite towards assets like crypto, driving more capital into Bitcoin spot ETFs, which have been particularly quiet over the past week," said Leena ElDeeb, research analyst at 21Shares. "There are still more metrics to keep an eye on, especially in the labor market, which will heavily influence whether the Fed will cut rates by 25 or 50 basis points."
Thursdays jobless claims and producer price index data will provide the Fed with a more comprehensive picture on the direction of inflation and whether the economy is headed for recession. For those still calling for a 50 basis point cut, ElDeeb said a more aggressive cut "would shock markets as it would signal a recessionary alert. Investors would trade cautiously in response to the market condition, which could hurt asset risk in the short term. However, it would not fundamentally change Bitcoins long-term outlook even with its macro connection."
If the U.S. economy shows more signs of weakness, it could trigger the Fed to expand its balance sheet, which historically has been a good omen for Bitcoin, which tends to attract more asset demand when liquidity is injected, she added. This months inflation data is coming at a very crucial time with the Presidential debate airing last night."
"While Bitcoin may take a unilateral move in the short term, it is a neutral, bipartisan asset, hedging against currency devaluation, especially for countries like Venezuela that are experiencing hyperinflation."
Across the wider market, analysts at BlackRock said they expected recent market volatility to last at least until early November amid heightened election activity in the U.S. We may see further volatility before the U.S. presidential election, BlackRock analysts led by Jean Boivin wrote in their weekly commentary.
We dont think the Fed will ease as aggressively as markets are currently pricing in, nor will it unwind holdings of U.S. short-term treasuries. We prefer intermediate-duration Treasuries and high-quality credit. They added: We see many factors driving market volatility: renewed recession fears stemming from some weak economic data, nervousness ahead of the U.S. elections, and profit-taking by investors as they clear space for new issues.
The analysts cautioned: We believe that even if inflation falls close to the Fed's target in the short term, rising medium-term inflation will limit the Fed's ability to ease policy.
Growth anxieties and cooling inflation have pushed the 10-year Treasury yield to its lowest level in 15 months, as investors price in over 100 basis points of rate cuts by year-end, and roughly 240 basis points of easing over the next 12 months, signaling a Fed response to a recession. They concluded: This would leave policy rates below our view of the neutral rate, which is the rate at which policy neither stimulates nor inhibits growth.
We underweight short-duration U.S. Treasuries, seeking income in other developed market areas, such as short-duration eurozone bonds and credit.
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