(Kitco News) – Volatility spiked across financial markets early on Thursday following the release of the June Consumer Price Index (CPI), which showed a decline of 0.1% over the previous month and an increase of 3.0% over the prior year, the slowest annual rise in consumer prices since early 2021.
Despite beating expectations and providing more evidence that the Fed could potentially begin reducing interest rates in September, traders remained hesitant to jump feet-first into the market. Instead, they adopted a more conservative approach, leading to declines in cryptos and stocks.
The CME FedWatch Tool now shows that Wall Street puts the odds of a rate cut in September at nearly 91%, but thus far, the only asset to really respond positively to the news has been gold, which is up 1.5% and trading at $2415.30 at the time of writing.
Data provided by TradingView shows that Bitcoin (BTC) initially responded positively, with bulls making a run at resistance at $60,000, only to be stopped short at $59,535. At that point, bears took control of the price action and dropped King Crypto to $57,555.
BTC/USD Chart by TradingView
At the time of writing, Bitcoin trades at $57,832, an increase of 0.25% on the 24-hour chart.
While the negative response to the CPI by Bitcoin and stocks has surprised many, Jag Kooner, Head of Derivatives at Bitfinex, thinks it's only a matter of time before BTC begins to climb higher at the prospect of lower interest rates.
"The lower-than-expected CPI reading today signals a more significant slowdown in inflation,” Kooner said. “This could reinforce the market's expectation of a rate cut in September (where Fed Fund futures puts the probability at 70% currently), boosting both equities and cryptocurrencies by increasing liquidity and risk appetite."
"This could indeed tip BTC into moving along with risk assets, as it would support the narrative of slowing inflation and a potential rate cut,” he added. “Investors will closely monitor Fed communications and market reactions to today's CPI release and upcoming Fed meetings to gauge the alignment of BTC with equities.”
“However, we believe that a single inflation print would not undo the supply overhang concerns for Bitcoin which would take some more time for the market to price in completely,” Kooner concluded.
Also putting pressure on Bitcoin’s price is the ongoing sales of large tranches of BTC by the German government, but analyst note that they have nearly exhausted their supply, meaning this source of weakness could soon disappear.
“The Germany sell-off is soon to be over, and thus far the Mt Gox distributions are more likely to be fear than a market capitalization event,” said Chris Martin, Head of Research at Amberdata. “These events are hitting the market at the same time as a ‘softening’ from major rallies this year: BTC ETF launches around the world and multiple waves of memecoin-driven activity.”
“DeFi Lending borrowing activity has also weakened alongside some major liquidations,” he added. “Comparing the current state of the market with March 2024, there's been a drop in momentum for new liquidity but we're far from being in a down market across any metric, and macroeconomic catalysts are on the horizon with the Presidential election and interest rates being a big focus for the next few months.”
For most analysts, the negative reaction by Bitcoin to the lower-than-expected CPI report is seen as only temporary, and soon, its price will start to trend higher.
“It’s been a rough time for Bitcoin, but it’s now approaching the bottom and beginning to stabilize,” said Jonathan Thomas, co-founder and CEO of Blueberry Protocol. “Price fluctuations have decreased, with implied and historical volatility narrowing by about 90 percent. This indicates that traders are being patient and expecting BTC to remain in a price range.”
“Investors have started to price in Mt. Gox and Germany news and there is less volatility around those two factors,” he noted. “Now that we’ve seen the bottom starting to form, the more realistic direction is up.”
“Blackrock and Fidelity’s ETFs have seen a positive streak this week and recorded over $200 million in inflows,” Thomas added. “Institutional interest remains in the industry as fund managers start to push SOL ETF applications forward. What we saw was a lot of panic and uncertainty, but there is more clarity on the next catalyst.”
And according to Arthur Cheong, founder and Chief Investment officer at DeFiance Capital, while many crypto natives have adopted a more bearish outlook in the short term, the traditional finance (TradFi) crowd has been more than happy to buy the dip, suggesting that they may be more adept at buying when there is blood on the streets.
Very interesting that tradfi crowds are buying the dips on BTC while crypto natives are mostly bearish and significantly derisk with the first major correction since 2023. https://t.co/Ov7VRU7a7f
— Arthur (@Arthur_0x) July 11, 2024
