This Wednesday, U.S. CPI numbers will be released, telling us if the Fed’s plan to fight inflation is working or not. Either way, markets will be impacted.
When U.S. CPI numbers are released every month, the data tends to have a strong impact on Bitcoin and crypto prices, both before and after the U.S. Federal Reserve makes its remarks.
We took a look at past data from this year and here’s what we found.
Observation #1: Volatility is high before the CPI release
A quick look at the numbers show us that Bitcoin rose an average of 2.11% in the 72 hours BEFORE the CPI was due to come out, with Bitcoin jumping by 5.06%, 4.23%, and 3.02%, in response to February, April, and June data respectively.
Such high volatility leading up to the release indicates that traders are placing their bets well before the data release.
What does that mean for us? That means that if you’re putting on that leveraged futures position 24 hours before the announcement, you might be too late already.
Observation #2: Earlier this year, Bitcoin tended to jump after the CPI release
From January to April of this year, inflation came in slightly above expectations, meaning that the U.S. economy was still slightly hot and that rates still needed to be kept high.
But what’s important is how the market interpreted it.
The market felt that the Fed’s plan to keep inflation was working, even if a little behind schedule. When the April report came in and CPI numbers hit their forecasts, Bitcoin jumped by 3.97%.
Observation #3: In the last two months, Bitcoin has dropped after CPI data releases due to fears over a recession.
Numbers from the last two months show that inflation has been coming down faster than expected, and Bitcoin’s price has responded adversely, dropping by 2.35% and 2.49%, in response to May and June data respectively.
This indicates that analysts and traders are no longer afraid of inflation, but are now afraid of a recession, and they’re afraid that the Fed isn’t moving fast enough to protect the economy against one. After all, unemployment has grown from 3.5% a year ago to a whopping 4.3%.
Here’s the backstory.
Interest rates in the U.S. have been at their highest point in the last twenty years to combat inflation, after the COVID-induced stimulus overheated the economy.
But now that inflation is coming down according to plan, analysts and traders are betting on the Fed cutting rates to protect the economy against a recession.
How does this work? When rates are cut, banks lend more to businesses, there’s more money in the money supply, and more money flows to investments and risky assets like stocks and crypto.
The only question now is when, and to what degree rates will be cut.
Central banks around the world have been cutting rates: the E.U. by 0.25% in June, the Bank of England by 0.25% in August, and Canada by 0.5% in June/July.
The market consensus is that the Fed will cut rates during their next meeting in September, but no one knows whether they will be cut by 25% or 50%.
Markets are waiting to see how the Fed and Fed Chairman Jerome Powell will react on Wednesday when CPI numbers come out – this is likely to be the critical point when they realize that inflation has been “defeated” and are ready to make a pivot in September.
In short, there are two likely scenarios for Wednesday:
- If July CPI rises by its predicted rate of 3% or lower, then the Fed will be confident inflation is on track to come down to their target of 2% and they can turn their attention to cutting rates in September, stimulating the economy and markets.
- If July CPI rises by more than 3%, it means that inflation has not been beaten and the Fed cannot cut rates, meaning that demand will continue to fall and we are likely to hit a recession, negatively impacting markets.
So this Wednesday, not only do you need to pay attention to the CPI numbers, but you also have to listen to the Fed’s outlook and guidance for the rest of the year.
Stay tuned! For more market insights, click here.
Key Takeaways
- Volatility is high both before and after U.S. CPI numbers are released
- In general, Bitcoin’s price tends to increase around the time that CPI numbers are released, but over the last two months it has decreased on fears of a recession and the Fed not moving fast enough to cut rates.
- Whether or not crypto markets rise or fall this week will depend on how the Fed reacts to inflation numbers on Wednesday – will officials announce intentions to cut rates by 0.25% in September, or 0.50%?
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