Bitcoin falls below $17k before CPI, scenarios to prepare for
A week could not be more important for Bitcoin and the broader crypto market! On Tuesday, at 8:30 a.m. ET, there will be the release of the Consumer Price Index (CPI).
Just one day later, on Wednesday 14 December at 2:00 PM ET, the Federal Open Market Committee (FOMC) will hold its last meeting of the year. For the fourth time this year, there will be an updated forecast for inflation and interest rates (point plot).
In general, it’s a simple basic scenario: if the numbers are better than expected, there will be a rally for risky assets like Bitcoin. If the CPI does not live up to expectations, Bitcoin could face another bear market low.
Did Bitcoin Overreact to PPI?
To assess how likely either scenario is, it’s also worth looking back at the recent release of the producer price index (PPI). PPI was higher than expected.
However, expectations were relatively high. Core PPI was forecast at 7.2% in October, but actually fell to 6.7%, down 0.5% month-on-month.
The forecast for core PPI in November was 5.9%. In reality, however, PPI came in at 6.2%. While this looks bearish at first, it really wasn’t. This still represented a decrease of 0.5% month on month.
PPI shows the same story. The value fell for two consecutive months, 0.5% and 0.6%. The expectation was a 1.1% decline in one month, which was extremely unrealistic.
The market’s projected target was an extremely low figure, and the failure to meet that expectation was somewhat of an overreaction. Inflation has continued to fall significantly, just less than less than expected.
In the end, expectations were a little out of touch with reality. In addition, the PPI is fundamentally more volatile than the CPI, and also fluctuates seasonally. With the Christmas and gift season, fluctuations are not uncommon.
A game of expectations
So what are the expectations for the CPI? CPI fell 0.5% in October to 7.7%, while 8.0% was forecast. Tuesday’s expectations are now 0.4% lower. Forecast CPI is 7.3%.
Core CPI is expected at 6.1%, which would represent a decrease of 0.2%. The reading in October was 6.3%, while the expectation was 6.5%, which created a positive surprise.
The forecast for the CPI and Core CPI is thus much more moderate and less unrealistic than for the PPI. Unlike PPI, there are no extremely high expectations.
Even a “small” surprise can be enough to make the market positive. In a best-case scenario, we see a figure of around 7% for the CPI on Tuesday.
Moreover, a renewed fall in the CPI could confirm that inflation has peaked. If the CPI falls for the sixth month in a row, fears of a new wave of inflation will also be subdued for now.
All eyes on the FOMC meeting
Last but not least, the CPI numbers will be quite crucial for the FOMC decision on Wednesday. The market has priced in a 78% probability that the Fed will slow the pace of rate hikes to 50 basis points at that meeting.
However, the words spoken at the FOMC press conference are likely to be even more important, as well as the forecasts for updated economic projections.
For the first time since September, the market will see an updated dot plot, an extremely important piece of information, as NewsBTC reported.
Banking giant ING, meanwhile, laid out some potential scenarios that could put the market in risk-off or on mode. ING’s base case is that the Federal Reserve will raise interest rates by 50 bps, with 5% at the end of 2023.
As monetary policy operates with long and varied lags, ING expects a slowdown in future rate hikes, and clear cuts in 2024. This scenario could give the bulls the powder they need to start a rally.
At press time, the Bitcoin price fell to $16,920 in Monday morning trading in Asia.
