Bitcoin is also waiting for US inflation

For a few days now, the price of Bitcoin has been virtually at a standstill, probably apprehensive about the release of the updated inflation figure in the US. 

It is important not to forget that changes in liquidity in the financial markets are probably the main market mover to date, with respect to the price of Bitcoin, hence economic policy measures from the Fed in particular carry a lot of weight. 

The price of Bitcoin and the relationship to US inflation

After the resounding jump on 23 October, which was largely unexpected, and then the further jump on 9 November, the price of Bitcoin first jumped above $35,000, and then also rose above $36,000. 

It is precisely this that seems to be the key share right now, as it has practically always hovered above $36,000 over the past six days, with one very brief and insignificant exception. 

This is a quote that had never been touched this year before 9 November, not even during the peaks in late October. 

In some ways it may seem curious that the price of Bitcoin has now been lateralizing for a few days near the yearly highs, but the reason trivially may just be the wait for the US data. 

What’s more, it should be mentioned that the yearly high, almost at $38,000, was touched on 9 November itself, on the wave of enthusiasm for the rise that had broken the $36,000 wall for the first time in 2023. 

So excluding that single peak, it has now been sideways around $36,000 or $37,000 for six days. 

Bitcoin awaits inflation data in the US

The fact is that it has been known for several days that updated data regarding inflation in the US in October will be released today, Tuesday 14 November. 

Therefore, after the jump on 9 November, it is possible that the markets may have pulled their oars in the boat a bit in anticipation of today’s data. Moreover, in between there was also the weekend, during which traditional stock exchanges are just closed. 

In theory today’s data should not be particularly important. 

It should be said that what matters most in that case is not the generic inflation figure, but the core one, that is, net of food and energy. In fact, what markets are most interested in is trying to predict the Fed’s next monetary policy moves, and the Fed specifically uses precisely core inflation to make its decisions. 

Markets expect a figure to be released today that is perfectly in line with the previous month’s, that is, with no change: 4.1%. 

Note that on the other hand, for general inflation they expect a reduction from 3.7% to 3.3%. 

The reaction of the markets

Since with regard to core inflation they expect no change, it is possible to imagine that if the forecast is confirmed the markets might not even react. 

The matter changes completely in case the figure turns out to be significantly higher or lower. In particular, if it turns out to be significantly higher, markets could also react very badly, given that for the past few months they have seemed optimistic about the effectiveness of the Fed’s restrictive monetary policy against inflation. 

In fact they now give only a 25% chance that the U.S. central bank will raise rates again in January, while they give 66% odds that it will leave current rates unchanged until March 2024. Indeed, they even put the odds at 41% that it will start lowering them in June. 

There is something to be said for the fact that if markets expect a drop in overall inflation, perhaps a smaller one in core inflation could also occur. If so they might also react well, and update the above probabilities to the positive. 

Fed monetary policy and Bitcoin

The price of Bitcoin is heavily influenced by large changes in liquidity in financial markets. 

There are not many central banks in the world that can significantly vary liquidity in financial markets, and the Fed is the one that can do this the most. 

For example, between 2020 and 2021 it flooded the markets with such a large amount of liquidity that it inflated virtually all prices of any publicly traded risk-on asset, including cryptocurrencies. 

In 2022, when inflation also flooded the consumer markets, it was forced to run for cover, and to start reducing liquidity. The current monetary policy, which is very restrictive in terms of interest rates, for example, is working, as it is reducing liquidity and thus prices. 

Now, however, the Fed has come to a crossroads, because it has been able to suspend rate increases as core inflation has fallen significantly, but it cannot yet lower them, since core inflation is still well above the 2% target. 

Markets are trying to guess what the next moves might be, and they are doing so by imagining what the Fed’s reaction will be as core inflation changes.  

The altcoins

Something different, however, is happening in the altcoin market.

It must be said that Ethereum instead is following Bitcoin, as it usually does, but the price performance of some cryptocurrencies is following a whole different path these days. 

Suffice it to say that in the last seven days BTC is at +5% and ETH at +9%, but Solana is at +33%, Polygon at +29%, Avalanche at +32%, and CRO at +21%. 

However, it is also possible that this was merely a late bounce. That is, BTC and ETH had risen a lot as early as January, and then had lateralized for a long period until October. Many altcoins, on the other hand, had indeed gone up in January, but then had gone down again. 

In fact, taking 31 December 2022 as a reference, BTC is now at +121% and ETH at +73%, while Polygon is still only at +24%, Avalanche at +57% and CRO at +62%. 

Only Solana’s SOL stands out, which is at +454% since the beginning of the year. The fact is that during 2022 the price of SOL had suffered more than others from both the implosion of Terra/Luna and the failures of Celsius and FTX. 

The commentary

Bitfinex analysts commented on the current situation saying:

“We have been discussing the possibility of a new bull market, or the ending stages of a bear market since December 2022 and throughout the rise we have seen in BTC since the beginning of the year.

However, it is important to be cautious. The STH and LTH levels can change, as these are dynamic measures and the realised price could move up as the price has a less pronounced pullback, or the pullback happens at a later date.

The Federal Reserve keeps a close eye on these consumer attitudes, especially since they have been aggressively raising interest rates to fight inflation. Their efforts are aimed at preventing these expectations from influencing consumer behaviour too adversely, and undermine their progress in controlling price hikes.

Despite high employment rates, and wage increases post-pandemic, US households maintain a pessimistic outlook, largely fueled by persistent inflation. 

Interestingly, consumer expectations regarding gasoline prices have also increased, contrary to the actual trend of decreasing fuel prices since September, as reported by the US Energy Information Administration.”