Declining Inflation Inspires Bitcoin’s Bullish Grumble
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| By Alex Benfield |
Over the past year and a half, crypto markets have largely been governed by two inescapable specters: inflation and interest rates.
These two are intricately linked, with the Federal Reserve manipulating interest rates to help tame inflation. It's a delicate balancing act, and the lag time between interest rate changes and their effects on inflation can be significant.
Currently, there are signs that the Fed's increased rates are finally starting to wear down inflation.
This morning, financial analysts across the country were eagerly awaiting the release of April’s Consumer Price Index report.
And the reveal was worth the anticipation: April's inflation clocked in at 0.4% month over month, bringing the year-over-year inflation to 4.9%.
This is the first dip below 5% since April 2021.
A notable milestone indeed — one that is likely to send ripples through the markets.
In the wake of this announcement, Bitcoin (BTC, "A-") saw a modest bump. It is up approximately $500 on the day, nudging the price to around $28,000.
Although this is not a headline-grabbing surge, this little grumble signifies the market's initial bullish response to declining inflation. If a lower CPI prompts the Fed to hold off on further rate hikes, we could see a bigger bullish surge in the crypto market.
After all, risk assets — particularly cryptocurrencies — have been itching for the Fed to pivot and lower rates. The sooner that happens, the sooner we will see the bulls stampede, driving prices skyward.
While Bitcoin has faced stiff resistance at the $30,000 level, if it can break that barrier, we could witness a price run this May. So far, support at $27,000 has held after prices started to slide following the rally that topped out in early April.
On a positive note, Bitcoin is not the only crypto holding on to its support levels.
In recent weeks, Ethereum (ETH, “B”) has managed to stay above the $1,800 support level after struggling to find its footing above $2,000.
This resilience has been paired with a year-long pattern of higher highs and higher lows. As long as this trend persists, we can expect crypto prices to continue their upward trajectory.
That's why the previous high of $2,150 is so crucial. If ETH can hurdle past $2,150, it will set a new high for the year.
However, if it fails to clear this level soon, we may be looking at a return to neutral conditions in the medium term.
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As we approach summer, we are keeping a keen eye on whether the market can muster one more push.
The market’s growing conviction that the worst may be over and that we are on the cusp of returning to more manageable inflation levels could be the spark we need for a summer rally in crypto prices.
That being said, we have been forthright about our expectations for a less-than-bullish summer for crypto markets. After all, the adage “sell in May and stay away” has historically held true, and we anticipate this year to be no different.
However, if prices tumble below current support levels, we may not see another rally until the end of the year. So, the price action over the next two weeks will be very important.
Looking forward, let’s hope the Fed takes note of today’s encouraging CPI print and realizes it no longer needs to raise rates. It takes time for the economy to truly digest the interest rate hikes, and we have already seen signs in the banking sector that the Fed likely raised rates too aggressively.
Hopefully the rate hikes don’t inflict further damage to the economy and the Fed patiently waits for inflation to come down now.
When the Fed eventually lowers rates again, we will see risk assets rise. But we need to figure out where crypto prices will level off in the meantime. That will give us our base for the next crypto bull run, which we still anticipate will happen sometime next year.
For now, we need to remain patient as we hope the Fed does the same.
Best,
Alex
