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| By Alex Benfield |
Last week, the financial landscape was rugged and stormy. After all, cryptocurrencies experienced a sharp plunge that took a toll on investors' portfolios.
As the dust began to settle, investors looked with hope toward the new week, eager for a fresh turn of events and potentially good news that might revitalize the struggling crypto market.
Namely, two important indicators of May’s critical inflation data were released recently.
Yesterday, the Consumer Price Index — an indicator of changes in the price level of a basket of consumer goods and services — came in at 4% year over year. This figure surpassed predictions by coming in at the lowest annual rate in two years.
And today, the other half of the data — the Producer Price Index — clocked in at a modest 1.1% increase year over year. PPI is a measure of the average change in selling prices received by domestic producers for their output. Not only was this a smaller rise than expected, but it also represents the 11th consecutive decline in PPI.
These declines are two welcome signals that inflation is gradually easing. This deflationary trend is progressing at a faster pace than most analysts had anticipated, with the minor caveat being that core CPI and PPI — which excludes food and energy — are not decelerating as rapidly as expected.
Will the Federal Reserve view these metrics as a successful outcome of its policies aimed at curbing consumer and producer inflation? Or will the Fed raise a red flag due to core inflation, which isn't dropping swiftly enough?
Answers to these questions will become clear when the results of the latest Federal Open Market Committee meeting hit the tape later today.
Now, let's consider potential implications. If inflation continues to trend downward, it could prompt the Fed to hit the brakes on hiking interest rates. The possibility of a pause or even a reversal in interest rate adjustments is a development that the financial world — particularly crypto enthusiasts — are keenly watching.
You might be wondering: How would this affect the cryptocurrency market? Well, lower interest rates typically mean cheaper borrowing costs, which can stimulate spending and investment.
In a climate of lower interest rates, investors often turn to riskier assets like stocks or cryptocurrencies to earn higher returns.
Moreover, if the Fed responds to lower inflation rates by reducing interest rates and thereby increasing money supply, theoretically, this could give the cryptocurrency market a much-needed boost.
As money printing adds more liquidity to the system, crypto assets — which are often seen as a hedge against inflation and monetary instability — could become even more appealing to investors.
Looking ahead, it's crucial for investors to remain vigilant and keep an eye on these economic indicators. The financial landscape can shift rapidly, so staying informed is the key to navigating these waves.
While the crypto market has had its share of hardships recently, the possibility of lower inflation and a more accommodative Federal Reserve might just pave the way for a potential upswing.
For now, let's wait and see what unfolds in the coming hours and days. The short- and medium-term outlook of the crypto market may very well hinge on it.
As Bitcoin (BTC, "A-") awaits the results of the FOMC meeting minutes, its price is sitting in a precarious position. BTC lost support at its 200-week moving average and is now getting dangerously close to the long-term uptrend represented by the orange line on the chart below.
Bitcoin’s two trend lines are getting closer to converging, which means Bitcoin will have to decide on its next direction very soon. If there’s a rally coming, BTC will need to close above the downtrend line that sits around $27,500 right now.
However, if BTC falls below that uptrend line, the entire crypto market is likely to shift neutral or bearish for months.
We are truly at a crucial inflection point.
Ethereum (ETH, “B”) is in a tougher position than Bitcoin right now, as it fell back below its downtrend line after the latest decline.
If ETH can’t muster up a rally by the end of this week, it is likely to enter a period of prolonged neutrality. That would look like a lot of up and down movement without higher highs and higher lows — just a bunch of seesawing within a large channel.
Overall, patience is key. We will have to wait and see how the market reacts to the FOMC news later today and if the bulls can make another run this week.
Indeed, the potential actions of the Federal Reserve in response to May’s inflation data could serve as a lifeline for the currently storm-tossed crypto market. If we see a pause or cut in interest rate hikes to go along with the lower inflation, this could create fertile ground for cryptocurrencies to bloom again.
As investors, it's essential to remember that the crypto journey is inherently a roller-coaster ride.
The recent downturn is a chapter, not the whole story. Even in uncertain times, the resilience and innovative spirit of the crypto world remain its defining strengths.
So, hold steady, stay informed and let's see what exciting new chapter unfolds next in this revolutionary financial landscape.
Best,
Alex
