On Friday (December 20), the dollar index challenged 108.50, gold remained weak at $2,594, and the Federal Reserve's hawkish bets continued to suppress precious metal buying. China's PPI has fallen for 26 consecutive months, and U.S. media warns that a deflationary spiral could lead to a prolonged recession. Bitcoin plummeted below $98,000, hitting a low of $96,648, as El Salvador compromised its Bitcoin policy to reach a $1.4 billion loan agreement with the International Monetary Fund (IMF).
China's PPI has declined for 26 consecutive months (Wall Street Journal): A deflationary spiral could lead to a prolonged recession.
(Wall Street Journal) reported that China's November Producer Price Index (PPI) fell by 2.5% year-on-year, marking the 26th consecutive month of decline, while the GDP deflator index has also remained negative for six consecutive quarters, setting the longest record since the late 1990s. Persistently declining prices not only compress corporate profits but also pose potential threats to investment and the job market.
Some analysts believe that the decline in prices within the supply chain reflects weak demand in the Chinese economy. When prices continue to fall, companies tend to further cut prices to survive, creating a vicious cycle. Penelope Prime, founder of the China Research Center at a U.S. think tank, stated, "This creates a vicious cycle."
U.S. media mentioned that the Chinese government recently launched a series of policies, including interest rate cuts, bond issuance for relief, and signals of monetary easing. However, these have only played a role in preventing systemic financial risks and have limited effects on promoting domestic demand and boosting consumption. Policy observers believe that these measures focus more on short-term issues and do not truly address structural challenges.
In contrast to the decisive capacity adjustments made by China during the late 1990s Asian financial crisis, including the closure of numerous state-owned enterprises, which ultimately succeeded in containing deflationary spread, the Chinese leadership appears to choose to maintain high manufacturing capacity in the face of a similar crisis. Analysts familiar with Beijing's decision-making point out that the Chinese leadership believes that a consumption-oriented economic model is unsuitable for China, thus insisting on a growth strategy centered on manufacturing.
Scholars point out that an over-reliance on capacity expansion rather than enhancing product added value has led Chinese manufacturing into vicious competition. When demand is insufficient, no matter how much prices are cut, the fundamental issues of inventory backlog and profit shrinkage cannot be resolved.
El Salvador 'reduces' Bitcoin policy; IMF agrees on a $1.4 billion loan agreement.
The International Monetary Fund (IMF) and El Salvador have reached an agreement on a $1.4 billion loan program, which will also facilitate additional financial support from the World Bank, the Inter-American Development Bank, and other regional development banks, with total financing plans exceeding $3.5 billion for the entire program. However, El Salvador needs to make significant adjustments to its Bitcoin strategy.
El Salvador became the world's first country to adopt Bitcoin as legal tender in September 2021. The IMF opposes El Salvador's adoption of digital currency, citing risks to financial stability and integrity. The IMF has repeatedly called for El Salvador to strengthen its regulatory framework and oversight of the national Bitcoin ecosystem.
In this negotiation, the IMF required El Salvador to adjust its Bitcoin strategy, including prohibiting the private sector from accepting Bitcoin by legal mandate; public sector participation in Bitcoin-related economic activities, as well as restrictions on Bitcoin transactions and purchases; taxes can only be paid in U.S. dollars; the government's participation in the crypto e-wallet (Chivo) will gradually be phased out; and there will be a strengthening of transparency, regulation, and supervision of digital assets to maintain financial stability, consumer and investor protection, and financial integrity.
In addition, the Salvadoran government will also commit to reducing the budget deficit as a percentage of GDP by 3.5 percentage points within three years, while implementing spending cuts and tax increases. Through anti-corruption laws, the liquidity buffer required for banks must gradually reach 15%, aligning banking supervision with the Basel III standards based on risk.
Israel and Hamas are nearing a ceasefire agreement.
AP News reported that Israel and Hamas seem closer to reaching a ceasefire agreement than they were a few months ago, which would end the 14-month war in Gaza and allow dozens of hostages held there to return home. Previously, both sides were close to an agreement but ultimately fell apart due to various disagreements. This round of negotiations also faces obstacles.
According to officials from Egypt, Hamas, and the United States, the agreement will be implemented in phases, including halting combat, exchanging captured Israeli hostages for Palestinian prisoners, and increasing aid to the besieged Gaza Strip. The final phase will include the release of all remaining hostages, ending the war, and negotiating reconstruction.
Participants in the negotiations say that although both Israel and Hamas are optimistic about an imminent agreement, key sticking points remain regarding the exchange of hostages and prisoners, as well as Israel's withdrawal from Gaza.
White House National Security Advisor Jake Sullivan stated on a program on Wednesday: "They are looking into the list of hostages to be released in the first phase—the list of prisoners to be released in exchange. Then there are some specific details regarding the deployment of Israeli forces during the ceasefire."
The Federal Reserve's 'hawkish' signals are strong, and the dollar index challenges 108.50.
The two-day Federal Open Market Committee (FOMC) meeting ended with a 25 basis point rate cut, but a smaller rate cut is expected in 2025, reflecting ongoing inflation and caution regarding future policy actions.
The updated macro forecasts and dot plot indicate that economic growth and inflation have been revised upward, leading to a more hawkish medium-term outlook. The median policy rate for 2025 has been raised from 3.375% to 3.875%, and the expected number of rate cuts has been reduced from four to two.
Federal Reserve Chairman Jerome Powell's tone is cautious, emphasizing the uncertainty and necessity of making tangible progress on inflation. Although rates were cut on Wednesday, the Fed hinted that policy easing may slow down or pause, thus maintaining the U.S. interest rate advantage.
The policies that President-elect Trump is about to roll out are unstoppable, prompting the Federal Reserve to consider the potential impact of fiscal stimulus measures on inflation and growth. This 'Trump effect' supports the dollar by widening spreads.
In terms of data, the number of initial unemployment claims improved to 220,000, below the expected 230,000.
In addition, the third quarter GDP grew by 3.1% quarter-on-quarter, exceeding the expected growth of 2.8%, with personal consumption expenditures (PCE) and core PCE indicators remaining stable.
Bitcoin Technical Analysis
CoinTelegraph pointed out that the Bitcoin price correction continues, resulting in the largest daily chart decline in the fourth quarter, and the largest drop since August 5. Although crypto assets briefly reclaimed positions above $100,000, the formation of a clear bearish engulfing pattern increased the likelihood of further corrections.
Since reaching an all-time high of $108,366 on December 17, Bitcoin has fallen to $98,744. Glassnode founder Rafael Schultze-Kraft identified the price range between $99,000 and $97,000 as the strongest support zone based on Bitcoin's cost basis distribution.
Cost basis distribution can help investors assess where total supply volume is acquired and how it is distributed at different price points.
Similarly, Bitcoin researcher Axel Adler Jr. also pointed out similar price points, which are significant. The researcher stated, "The recent important support level is at $97,900, held by a group that has held tokens for one week to one month."
From a technical perspective, Bitcoin's bullish market structure remains intact in both mid-term and long-term charts. Combining on-chain derived support levels and market analysis, a consensus point between $97,500 and $95,500 was established.
A fair value gap (FVG) was found within this price range, and it may have retested the 50-day EMA level for the first time since October 12. Additionally, $95,000 is also a key benchmark support for trend continuation.
Considering that the daily candlestick closing price is below $95,000, the possibility of Bitcoin dropping to $90,000 has greatly increased, and a key liquidity area has been established. However, the immediate focus of most traders is on Bitcoin's response between $100,000 and $95,000.
