(Kitco News) – Asset prices spiked higher in early trading on Tuesday after the latest Consumer Price Index (CPI) came in cooler than expected, but the gains moderated in the afternoon after the Federal Reserve held interest rates unchanged and projected just one rate cut this year, down from the two markets had been anticipating.
“Consumer prices were unchanged in May from the previous month, which is a good sign, considering the slight decline of the CPI in April,” said Leena ElDeeb, Research Associate at 21Shares, in a note shared with Kitco Crypto.
“That said, investor appetite for risk-on assets, like crypto, is expected to mirror what we saw in the last CPI reading now that the Federal Reserve has some positive signals,” she added. “However, unemployment rising against expectations could cause some pushback.”
“We think the rate cuts by the ECB and Bank of Canada can also influence the Federal Reserve to relax the target inflation rate to a more realistic figure,” ElDeeb said. “Benchmarks of monetary policy success are shifting around the world. The 2% inflation rate target is no longer within reach in the immediate term, while high interest rates seem to be doing more harm than good.”
ElDeeb pointed to struggles in the banking sector as one possible reason the Fed may be forced to cut rates sooner than they would wish.
“The higher-for-longer approach is straining the banking sector in the U.S,” she noted. “63 banks are declared to have $517B in unrealized losses, which increased by $39B in the first quarter. This data by the FDIC could also influence the Federal Reserve to cut rates soon.”
Analysts at Bitfinex said the decision to hold rates steady shows that the Fed remains cautious regarding inflation.
“The Federal Reserve has decided to hold interest rates steady, signaling a cautious approach amidst mixed economic signals,” they said. “This decision reflects the Fed's focus on balancing inflation control with economic stability.”
“Historically, both rate cuts and holding decisions have significant impacts on asset flows and market prices,” the analysts noted. “For instance, past decisions to cut rates have typically resulted in increased asset prices and ETF inflows, as seen in the gold market.”
“Similar patterns are expected in the cryptocurrency market,” they added. “All eight of the last CPI and FOMC events have caused increased volatility, at least on an intra-day or intra-week basis. Since March, however, this volatility increase has been short-lived.”
They said that despite the Fed’s decision to hold rates steady, the global trend is towards rate cuts, and it's only a matter of time until the U.S. central bank falls in line.
“Central banks around the world have already started to cut rates, which suggests a broader trend towards monetary easing,” they wrote. “It seems clear that the Bank of England and the Federal Reserve will follow suit in the coming months. The global liquidity cycle indicates that money supply is likely to increase, which can support asset prices, including cryptocurrencies.”
In the near term, they see increased volatility for cryptos as the market integrates the latest developments.
“Since the Fed decided to maintain current rates, Bitcoin (BTC) might experience short-term volatility as the market adjusts to the news,” the analysts said. “However, the overall trend could remain positive, especially if the broader economic outlook continues to improve.”
“Historically, three out of the last four CPI prints have also led to local tops for Bitcoin, indicating potential volatility around such announcements,” they noted. “Bitcoin could consolidate around current levels or experience moderate gains as investors remain optimistic about future rate cuts later in the year.”
They also suggested that flows into spot Bitcoin ETFs “may stabilize with a hold decision, as investors await clearer signals from the Fed's future policy moves.”
“Spot Bitcoin ETFs might see steady inflows, but the momentum could be less pronounced compared to a rate cut scenario,” they added. “The launch of Ether ETFs could still attract significant interest, potentially leading to diversified investments across both Bitcoin and Ethereum ETFs.”
Bitcoin price spiked above $70,000 during morning trading after the CPI was released, but almost fully retraced in the afternoon following hawkish comments from Fed Chair Powell.
BTC/USD Chart by TradingView
At the time of writing, Bitcoin trades at $68,250, an increase of 1.5% on the 24-hour chart.
Stocks opened higher and managed to maintain most of their gains throughout the trading day, except for the Dow, which drifted into the red near the market close. At the closing bell, the S&P and Nasdaq were up 0.85% and 1.53%, respectively, while the Dow lost 0.09%.
Altcoins rally higher
On the whole, it was a positive day for altcoins as a majority of tokens in the top 200 recorded price increases.
Daily cryptocurrency market performance. Source: Coin360
Io.net (IO), a newer DePIN token on the scene, was the top performer with a gain of 35%, followed by Livepeer (LPT), which climbed 19.3%, and Injective (INJ), which increased 12.6%. Akash Network (AKT) was the biggest loser, falling 10.5%, while FLOKI (FLOKI) lost 7.9%, and MANTRA (OM) declined by 5.3%.
The overall cryptocurrency market cap now stands at $2.48 trillion, and Bitcoin’s dominance rate is 54.1%.
