Economic Data and Its Impact on the Market
The upcoming U.S. inflation report, set to be released on Wednesday, is likely to have a significant impact on the market, particularly on risk assets such as Bitcoin (BTC). While a soft inflation report may be seen as positive, those expecting a surge in the market may be disappointed.
Inflation Report
The Labor Department will publish the January consumer price index (CPI) report on Wednesday at 13:30 UTC. According to Reuters estimates tracked by FXStreet, the cost of living is expected to have increased by 0.3% month-over-month in January, slowing down from December’s 0.4% rise. The annualized figure is expected to match December’s 2.9% reading.
The core inflation, which strips out the volatile food and energy component, is forecast to have risen to 0.3% month-over-month from 0.2%, resulting in an annualized reading of 3.1%, down from December’s 3.2%.
Fed Rate Cuts
A lower-than-expected inflation reading, particularly the core figure, will likely bolster expectations for further Federal Reserve (Fed) interest rate cuts. This could lead to lower Treasury yields and a weaker dollar index, ultimately boosting demand for riskier assets. According to CME’s FedWatch tool, the market currently estimates a 54% chance that the Fed will either cut interest rates once or not at all this year.
Impact on Bitcoin (BTC)
While a potential adjustment in Fed rate cuts could lift BTC, it is unlikely to be the sole catalyst for a breakout from the ongoing consolidation between $90,000 and $110,000. This is due to forward-looking market metrics indicating higher inflation in the coming months amid trade war fears, suggesting that the Fed may have a limited window to implement aggressive rate cuts.
Inflation Swaps
Data tracked by Mott Capital Management shows that two-year inflation swaps have climbed to nearly 2.8%, the highest since early 2023. The five-year swap is exhibiting a similar trend. Higher inflation swaps indicate that the market is expecting inflation rates to rise in the future, prompting investors to pay a higher premium to protect themselves against potential purchasing power loss by entering into swap contracts tied to CPI.
Fed’s Monetary Policy
In his testimony to Congress on Tuesday, Chairman Jerome Powell indicated that the central bank is in no hurry to cut rates. RBC’s weekly note stated, "We don’t expect that progress on inflation will be enough to prompt additional interest rate cuts from the Fed this year." BlackRock also stated, "We see persistent services inflation forcing the Fed to keep rates higher for longer."
Conclusion
The upcoming U.S. inflation report is likely to have a significant impact on the market, particularly on risk assets such as Bitcoin (BTC). A soft inflation report may lead to a decrease in interest rates and a weaker dollar index, boosting demand for riskier assets. However, forward-looking market metrics indicate higher inflation in the coming months, which may limit the Fed’s ability to implement aggressive rate cuts.
FAQs
Q: What is the expected inflation rate for January?
A: The cost of living is expected to have increased by 0.3% month-over-month in January, slowing down from December’s 0.4% rise.
Q: What is the expected rate of core inflation?
A: The core inflation is forecast to have risen to 0.3% month-over-month from 0.2%, resulting in an annualized reading of 3.1%, down from December’s 3.2%.
Q: What is the likelihood of Fed rate cuts in 2023?
A: According to CME’s FedWatch tool, the market currently estimates a 54% chance that the Fed will either cut interest rates once or not at all this year.
Q: How will a soft inflation report impact the market?
A: A soft inflation report may lead to a decrease in interest rates and a weaker dollar index, boosting demand for riskier assets such as Bitcoin (BTC).
