US Inflation Data Impact on Bitcoin: Analyzing Market Reactions and Future Predictions

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The US Consumer Price Index (CPI) inflation figures were recently released, with Bitcoin (BTC) appearing to respond positively at first, as it rallied and reached session highs in the $28,300s. According to the CPI report, headline inflation fell to 4.9% YoY in April, marking its first sub-5.0% reading in over two years – slightly below the median economist forecast for a 5.0% YoY. As it turned out, the data showed US price pressures remain way above the Federal Reserve’s 2.0% inflation target; however, progress since the YoY CPI rate reached 9.1% last summer has been taken as good news by the market.

Bitcoin’s price subsequently experienced a sharp decline, falling from above $28,000 to under $27,000 within minutes. This price drop may be attributed to US government movement of some of its confiscated Bitcoin holdings from Silk Road. If the US government begins selling BTC on a massive scale, it could create significant, albeit short-term downside pressure on the Bitcoin price. This recent price drop may be the result of algorithms attempting to preempt a US government Bitcoin sale.

Investors interpreted the latest CPI data as reducing the likelihood of the Federal Reserve lifting interest rates by a further 25 basis points at its June policy meeting. Implied odds from the CME’s Fed Watch Tool suggest that the Fed will hold interest rates for the first time in eleven meetings next month, with a probability of around 95%.

Economists anticipate that the delayed impact of the Fed’s aggressive rate hiking cycle, combined with the new headwind of a contraction in lending due to a regional bank crisis, will result in the US economy entering a recession in the second half of the year. Consequently, the Fed may be forced to respond with rate cuts.

With respect to Bitcoin, the latest US data supports the prevailing macro narrative that easier monetary policy conditions are on the horizon. Despite the possibility of short-term choppiness due to concerns about a BRC-20 fueled transaction fee spike, the cryptocurrency’s long-term bull market thesis is likely to remain intact. This is because easier monetary policy conditions generally benefit Bitcoin, which has displayed a strong positive correlation to US liquidity conditions in the past.

BTC/USD seems to have formed a pennant structure since its mid-March pump, which could break either upward or downward shortly. With the cryptocurrency having recently lost its grip on both its 21 and 50-Day Moving Averages, some analysts predict a near-term retest of key support in the $25,000s. However, even if Bitcoin tests these levels, its 2023 uptrend will not be threatened.

As long as the US bank crisis continues to develop, demand for “hard money” alternatives to fiat, such as Bitcoin and gold, is likely to be underpinned.

Source: Cryptonews

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