- The US inflation rate is set o be announced on August 10, and the expectation is for 3.3% year-over-year.
- Bitcoin price could benefit from this outlook, considering the correlation between BTC and US Dollar has dropped sharply.
- BTC could experience a shot of volatility, causing it to rise up and retest $30,000 after the CPI announcement.
The announcement of the US inflation rate, aka the Consumer Price Index (CPI), on August 10 at 12:30 GMT could further clarify Federal Reserve’s next step. Based on the forecasts, the year-over-year inflation rate is expected to rise from 3% in June to 3.3% in July. Cryptocurrency enthusiasts are likely to watch this event closely as it could bring back the volatility after months of sideways movement.
The US CPI could catalyze another rate hike from the Fed
On August 10 at 12:30 GMT, the United States Consure Price Index numbers will be revealed, giving the Federal Reserve (Fed) a chance to look at the data and decide its next path to reduce inflation. The Fed has set a 2% inflation target, so a spike in prices could suggest an upcoming interest rate hike in September.
The last rate hike of 25 basis points in July had no impact on Bitcoin price whatsoever, and the lack of reaction could be attributed to the drop in correlation between the US Dollar and BTC. But after more than a month of sideways movement, Bitcoin price could see a spike in volatility on the release of CPI.
Inflation FAQs
What is inflation?
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
What is the Consumer Price Index (CPI)?
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
What is the impact of inflation on foreign exchange?
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
How does inflation influence the price of Gold?
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it.
Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
Bitcoin price and its next two steps
Bitcoin price currently hovers around $29,236 and is eyeing a run-up to $30,340. The said level is key as it coincides with the midpoint of the recent 9% downswing and the imbalance formed during this drop.
This short-term move to the upside will allow short sellers to open fresh short positions before Bitcoin price eventually crashes to key support levels at $28,138, $27,330 and $26,761, respectively.
BTC/USDT 4-hour chart
A higher CPI number would favor an incoming raise in interest rate from the Fed. A higher interest rate would denote a stronger US Dollar, which is typically bearish for risk-on assets like stocks or Bitcoin. From the start of 2022, US Dollar and other macroeconomic events have played a significant role in controlling Bitcoin price.
But of late, the correlation between the US Dollar and Bitcoin price has been on a decline. Hence, the release of US Nonfarm Payrolls in July had little effect on BTC. Moreover, the lack of volatility has pushed investors from centralized platforms to decentralized ones, which has triggered a massive spike in alt season for on-chain altcoins.
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