Bitcoin and altcoins fail to rally as US inflation slows.
Investors' risk appetite tends to increase with low capital costs and high liquidity, creating a favorable environment for high-growth assets. Therefore, Bitcoin (BTC) and other cryptocurrencies often benefit from such situations, as the demand for more money in circulation usually increases. But, if US inflation seems to be under control, why is the cryptocurrency market reacting positively?
Interest rates reduce the impact on corporate earnings and real estate markets
The United States Federal Reserve (Fed) closely monitors the labor market, inflation and the value of the US dollar to adjust policy accordingly. As inflation nears the Fed's 2% target, it can lower interest rates and provide the necessary capital to banks, especially when the economy is showing signs of weakness. This movement, known as expansion, reduces the incentive for fixed income investments.
The latest figures from the Federal Reserve's preferred inflation indicator showed that inflation slowed for May. Over the period, rate hikes grew at their slowest pace since March 2021, marking the first time this economic cycle that inflation has exceeded the Fed's 2 percent target. The core personal consumption expenditures (PCE) index, excluding food and energy costs, rose 2.6% year-on-year in May, in line with economists' forecasts.
San Francisco Fed President Mary Daly commented in an interview with CNBC's Andrew Ross Sorkin, “It's more news that monetary policy is working, inflation is slowly slowing.” Additionally, the U.S. Bureau of Economic Analysis said personal income rose 0.5% on a monthly basis, beating expectations of 0.4%. On the other hand, consumer spending grew by 0.2%, slightly below the expected 0.3%.
At the beginning of the year, market traders expected at least three interest rate cuts; However, the current projections have been revised down to just two, with an expected launch in September. “Further inflation, typically coupled with evidence of further labor market easing, will be necessary to pave the way for the first rate cut in September,” Seima Shah, chief global strategist at Major Asset Management, told CNBC.
The most recent US inflation data, along with a 4% unemployment rate and personal income growth, led the S&P 500 to record highs on June 28. However, the total cryptocurrency market capitalization in 2018 It is down from the March 14, 2024 high. Even gold, traditionally a hedge asset, is now 5% below its all-time high since May 20.
Related: Bitcoin activity drops to lowest level since 2010
Cryptocurrencies tend to underperform when the US dollar shows strength
In theory, cryptocurrencies should benefit from interest rate cuts and other expansionary measures due to their scarcity and unpredictable payment methods. However, the relative success of the Fed's strategy has strengthened the US dollar, which can be measured against a basket of foreign currencies using the Dollar Strength Index (DXY). A higher DXY index means the Euro, GBP and Swiss Franc are losing value.
The DXY index is currently flirting with 106, its highest level since November 2023, and the US 5-year Treasury yield has fallen to 4.30% from 4.72% on April 25. Inflation will decrease without economic collapse. In this scenario, traders expect the stock market to reach new highs without causing a major shock to the real estate market.
This hypothesis explains why low inflation has not had a positive impact on the cryptocurrency market. However, there is still uncertainty about how the economy and the US dollar will fare if the Fed opts for an expansionary monetary policy. Therefore, a rally for Bitcoin and cryptocurrencies after 2024 should not be ruled out.
This article does not contain investment advice or recommendations. Every investment and business activity involves risk, and readers should do their own research when making a decision.
