Bitcoin and Altcoins Stay Stagnant Despite Cooling US Inflation

Despite recent cooling in US inflation, the cryptocurrency market has not seen the anticipated rally. Traditionally, lower inflation leads to increased investor risk appetite due to a lower cost of capital and higher liquidity, which typically benefits high-growth assets like Bitcoin and altcoins. However, despite favorable conditions, the crypto market remains stagnant.

The US Federal Reserve plays a crucial role in this scenario, closely monitoring the job market, inflation, and the value of the dollar to adjust its policies. When inflation trends near the Fed’s 2% target, it opens the door for reducing interest rates and injecting liquidity into the economy.

May’s inflation data revealed a deceleration, with the core Personal Consumption Expenditures (PCE) index rising by 2.6% year-over-year, aligning with economists' predictions. This marked the slowest price increase since March 2021.

San Francisco Fed President Mary Daly noted that this gradual cooling of inflation indicates that monetary policy is working. Market traders had initially expected three interest rate reductions earlier in the year, but now anticipate only two, starting in September. Despite these favorable conditions, the total cryptocurrency market capitalization has declined from its 2024 peak in March, while the S&P 500 reached an all-time high in late June.

One significant factor is the strength of the US dollar. Cryptocurrencies tend to underperform when the dollar is strong, as measured by the US Dollar Index (DXY). Currently, the DXY is near its highest level since November 2023, indicating strong dollar performance. This relative success of the Fed’s strategy, which strengthens the dollar, has dampened the expected positive impact on cryptocurrencies.

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