Here’s How the Latest Hot US CPI Numbers Impacted Crypto Markets

Hotter-than-expected US Consumer Price Index (CPI) inflation numbers did little the shift sentiment in the crypto market on Thursday.

Bitcoin (BTC) was last trading just under $26,700, just to the north of its 50-Day Moving Average (DMA), which appears to be offering support for now, but still trading with a negative bias, down around 0.7% on the day.

The world’s largest cryptocurrency is still trading with a negative bias since breaking to the downside of a short-term uptrend that it had been in since mid-September earlier this week.

The latest CPI report showed headline inflation running at 0.4% MoM and 3.7% YoY, both 0.1% above median economist expectations.

Core CPI, which is monitored more closely by the US Federal Reserve as a gauge of underlying price pressures in the US economy, was in line with expectations at 0.3% MoM and 4.1% YoY.

The market’s muted reaction could be explained by the fact that the higher-than-expected headline reading was driven by a surprise jump in rental costs.

According to Reuters, economists expect the jump in rental costs to decline in the coming months, given it is at odds with various independent surveys that tend to lead the CPI by a few months and all show falling rental costs.

What Does the Latest CPI Data Mean for the Fed?

Core inflation running at 0.3% MoM and 4.1% shows the Fed still has some way to go in terms of bringing inflation back to its 2% goal.

But with interest rates at multi-decade highs at 5.25-5.5%, more than 1% above inflation (implying a “real interest rate” of over 1%), the Fed will want to err on the side of caution regarding further tightening, as it may have already done enough.

That point is further driven home by that mortgage rates are at 23-year highs and credit card borrowing costs at all-time highs, as highlighted by ING.

The bank noted that “the market pricing around the possibility of a rate hike by December has increased marginally, but we doubt it will happen,” before explaining that “Fed officials have been emphasising the importance of the increase in Treasury yields as a factor that will tighten financial conditions and reduce the need for another rate hike”.

The US 10-year yield, which was up 15 bps on Thursday around 4.70% recently hit multi-decade highs near 4.90%.

The money market implied odds of another 25 bps rate hike from the Fed this year was last around 31%, up around 5% versus Wednesday, as per the CME’s Fed Watch Tool.

What This Means For Crypto

Whether or not the US Federal Reserve hikes interest rates again remains close to a coin toss.

But one thing that is more certain is that the end of the Fed’s tightening cycle is near.

At its last meeting, the Fed forecasted two interest rate cuts in 2024.

The macro narrative for 2024 looks set to be focused on easing financial conditions, rather than tighter financial conditions.

Traders who have been in the crypto game for a few years might now have flashbacks to 2019.

In early 2019, the Fed signalled a pause in interest rate hikes (once they had gotten to around 2.5%).

Bitcoin proceeded to post a 4x rally between February and June 2019, with other cryptos also rallying.

History may not exactly repeat itself, but macro looks set to become a tailwind for crypto next year.

Other major bullish catalysts like the upcoming Bitcoin halving and potential approval of a wave of spot Bitcoin ETFs in the US could add further fuel to this bullish narrative.