US inflation data could test Bitcoin’s rally
The US consumer price index report is expected to show lower inflation in August, which is one of the reasons why the price of bitcoin (BTC) has risen since Friday.
But the new data could show that while price pressures are cooling, it’s still too hot for Federal Reserve officials to ease monetary policy tightening.
“Inflation gauges for August are likely to be very soft, but that won’t change the bottom line,” economists at Bloomberg wrote. “The totality of the data that Fed Chair Jerome Powell will follow shows few signs of a cooling in the economy, and perhaps even some acceleration.”
The latest CPI report will be published by the Ministry of Labor on Tuesday at 8:30 a.m. ET (12:30 p.m. UTC). According to a survey by FactSet, the CPI in August was probably up 8.1% over the past 12 months. That pace would represent the second straight monthly decline, down from 8.5% in July and a four-decade peak of 9.1% in June.
The expectation is that the prices of petrol, airline tickets, hotels and used cars went down last month, while food prices were up. The Federal Reserve’s target is 2% annually.
Bitcoin gained 15% over the weekend in a rally that started after the European Central Bank raised interest rates by 75 basis points, or 0.75 percentage points, the biggest increase in the ECB’s history.
In addition, Chicago Federal Reserve President Charles Evans said Thursday that the U.S. central bank is likely to go ahead with an aggressive interest rate hike on Sept. 22, even though the latest CPI number shows cooling price pressures. Still, he said the Fed may not need to push. rates above 3.5% “as soon as possible”, suggesting the Fed may take a more dovish stance in the future. The federal funds rate is now between 2.25% and 2.5%.
Bitcoin (BTC), the largest crypto asset by market capitalization, was trading at $22,153 at press time, its highest price since mid-August.
“It may take some time for inflation to return to the Fed’s target, but even a moderation from the current fiery pace should be very good for overall consumer sentiment,” said Brendan Murphy, head of global rates, North America, at Insight Investing.
“The Fed has spent most of 2022 addressing the implications of higher rates and committing to tightening monetary policy as much as necessary to ensure that these rate increases return to target. This means higher interest rates and tighter economic conditions until inflation is under control, Murphy said.
A report by the International Monetary Fund showed that the US unemployment rate, now at 3.7%, may need as high as 7.5% for inflation to slow to the central bank’s target of 2%, Reuters reported.
Although the Fed is confident that a “soft landing” is still possible, the research concluded that “a painful and prolonged increase in unemployment” is inevitable to tame inflation.
From a technical standpoint, the recent rally in bitcoin may not last long.
“BTC technicals continue to look bearish in the near term,” David Duong, head of institutional investments at crypto exchange Coinbase, wrote in a report. “A further rally could be terminated from here.”
