Original title: Bitcoin Waits for Guidance From U.S. Inflation Data, Bond Market

Original article by Omkar Godbole

Original source: coindesk

Compiled by: Mars Finance, Daisy

  • The U.S. CPI data to be released on Thursday is expected to provide evidence of continued improvement in inflation, thereby increasing the likelihood of a rate cut by the Federal Reserve.

  • The prospect of a rate cut from the Federal Reserve has strengthened, which could herald a recovery for BTC.

  • BTC bulls should be wary of a possible “steepening” in the Treasury yield curve.

With the oversupply problem in the German state of Saxony all but eliminated, Thursday’s U.S. Consumer Price Index (CPI) report will be key in determining the direction of the Bitcoin market. The data, due at 12:30 UTC (8:30 ET), is expected to show that the cost of living in the world’s largest economy rose 0.1% month-on-month in June, compared with a flat reading in May, and 3.1% year-on-year, according to economists surveyed by Dow Jones. The core CPI, which excludes volatile food and energy prices, is expected to rise 0.2% from May and 3.4% from June last year. If the actual numbers match expectations, it would confirm that the Federal Reserve (Fed) continues to move toward its 2% inflation target and set the stage for the bank to begin its much-anticipated rate-cutting cycle this year.

The increased prospects for rate cuts could be a boon for risk assets including bitcoin, helping the leading cryptocurrency extend its rally from a low of around $53,500 on July 5. The recovery has stalled, with buyers struggling to gain a foothold above the $59,000 mark, according to CoinDesk data. “The CPI data will be closely watched, and markets are expected to react significantly to the data. Analysts’ bullish outlook for late 2024 and 2025 hinges on the FOMC lowering policy rates, as lower rates typically increase liquidity, driving investors toward ‘long-tail’ assets like cryptocurrencies,” algorithmic trading firm Wintermute told CoinDesk in an email. Inflation has slowed sharply from a high of 9.1% in 2022. However, in recent months, the Fed has reiterated that it needs to see further progress on inflation before stopping rate hikes. On Tuesday, Fed Chairman Jerome Powell echoed the same sentiment in his testimony to Congress, while stressing that the Fed will not wait until inflation cools to 2% before cutting rates. Since last Friday’s weak nonfarm payrolls report, traders are pricing in about a 70% chance of a Fed rate cut in September and are pricing in a rising chance of another rate cut in December, according to the CME’s FedWatch tool.

Focus on bonds

The reaction of the U.S. Treasury yield curve to the expected weak CPI data could affect broader market sentiment, including Bitcoin. Slowing inflation and increased expectations of rate cuts could push up two-year Treasury prices, causing their yields to fall. This is because when investors foresee lower interest rates, they are willing to pay a premium for securities that currently have higher yields. Meanwhile, the 10-year Treasury yield is likely to remain elevated as the market worries about the potential widening of the budget deficit if Trump is elected president. The odds of Republican candidate Donald Trump winning the November 4 election have increased recently.

The net effect will be a so-called bull steepening of the yield curve, represented by the spread between 10-year and two-year Treasury yields. The curve has inverted, with the two-year yield persistently higher relative to the dollar since mid-2022. Bull steepening periods, or rapid normalization of yield curve inversions, have historically occurred during economic contractions, coinciding with risk aversion, according to the CAIA Association. “Typical bull market steepening periods are: 1990-1992, 2001, 2003, 2008, and 2020, all recessionary years,” CAIA said in an explanation. “Equities generally underperform in such regimes, significantly lagging the overall historical average,” CAIA added. Noelle Acheson, author of the Crypto Is Macro Now newsletter, made a similar observation in a July 4 edition, saying that “sharp steepenings always precede the start of a recession.” Acheson added that the curve has steepened recently due to ongoing political uncertainty in the U.S. “It also makes a Trump victory during this period more likely, which means inflation could rise, driven by tariffs and massive bond issuance to finance promised tax cuts,” Acheson explained.

Investment banks such as JPMorgan Chase & Co. and Citigroup Inc. are betting on a steepening yield curve.

The green shaded area represents a U.S. recession. (Noelle Acheson, TradingView) (Noelle Acheson, TradingView)