- The US CPI came in at 6.5%, which was in line with expectations and is the lowest level since November 2021.
- Core inflation was 5.7%, down from 6% the month before, and inflation from one month to the next was -0.1%, showing that inflation is going down.
- With a 30% increase since its cycle lows, Bitcoin has risen above $20,000. BTC is still almost 70% lower than its all-time high.
- Ethereum has increased over 20%, and the total value of all digital assets has once more surpassed the pivotal $1 trillion mark.
- The Federal Reserve’s December Consumer Price Index report, which mostly met market expectations and indicated that inflation in the U.S. economy is showing signs of cooling, caused the price of bitcoin to increase last week eventually.
For cryptocurrency investors who have placed long bets on either asset, the decline in inflation expectations is a positive development. The anticipated 5% price increase is roughly in line with what senior Federal Reserve officials anticipate for interest rate levels in 2023. Inflation will be slowed by the smaller gap between price increases and rate levels. For comparison, the federal fund’s target rate at the time ranged from 0.25% to 0.50%, and the inflation rate in March 2022 was 8.5%. The sooner markets start to anticipate a shift away from monetary tightening, which could have an impact on price momentum for both bitcoin and ether, the sooner the gap between inflation and the federal funds rate narrows.
Last week, US inflation data dominated the macro focus and continued to complement in out peak rates, peak inflation theme. The US CPI was reported at 6.5%, in line with expectations, down from 7.1% the previous month and the lowest level since November 2021. Core came in at 5.7% vs. 6% previously, and month-over-month inflation was 0.1%. After rising more than 30% from its cycle low, Bitcoin (BTC/USD) is currently trading back above the $20k mark, marking an impressive start to 2023. BTC is still nearly 70% below its all-time high, but given the technical setup and recent developments, there is a sense that this most recent rally is more than just a “bounce.” Supply chain normalization and global central bank tightening are both working to rapidly reduce inflation. The “punch bowl” of money has been removed, and supply chains have nearly returned to normalcy ,China’s reopening has accelerated this process. Additionally declining, M2 money supply growth is a good indicator of CPI . In fact, it would imply that the rate of deflation is going to be much faster than most people currently anticipate and may fall below 2% by Q4.
Fear and Greed index
Markets have begun to factor in cutbacks of about 50 bps from June through the end of this year. Naturally, the Fed’s talking heads continued this week to dismiss the idea of any rate cuts this year and to stick to their tried-and-true position of keeping rates higher for longer until they are confident that inflation will return to target. In response to an unwarranted easing of financial conditions, we think increased efforts to talk down markets over the upcoming weeks, which will result in a little bit more volatility.
Investor sentiment is improving, even though the market is still technically in a bear market compared to last week. Investors’ opinions of the market reached a monthly high, according to the Fear and Greed Index, a cryptocurrency-specific metric that measures sentiment using five weighted sources. Although it hasn’t yet returned to pre-FTX levels, the price of bitcoin surpassed $21,000 on January 13 for the first time since November 8, 2022. The crypto market is still facing challenges, such as significant layoffs at exchanges in a tightening macroeconomic environment, legal issues with Gemini and Genesis, and the potential creation of a U.S. House subcommittee focusing on cryptocurrencies.
Bitcoin Price Overview:
We think there is still room for this rally as long as the $18,000 price level is not broken and is respected for Q1’2023. The macro picture and broader risk sentiment must remain positive in order for a bullish call on BTC to be made from this point, which reflects the general optimism for Q1’2023. Looking at the chart, it’s encouraging to see BTC climbing above the long-term downward trendline that had been in place through the entire year of 2022 and back above $20,000. According to the books, it has broken out higher, and as more traders and investors get involved, the momentum is growing. At the same time, it’s crucial to understand that significant technical resistance points, such as $21,500 and $22,400, are close by. The ideal scenario would be for BTC to trend over $25k, which would denote a more significant change in positive momentum and bring the market back to levels from the first half of last year.
Concluding Thoughts:
Cryptocurrencies started the year off well because of the slow macro shift that we’ve been talking about, which was confirmed by weaker CPI numbers in Europe. Then, the US Non-Farm Payrolls report showed lower earnings, and Thursday’s CPI report added to the momentum of the data. But the big move up happened late on Friday and over the weekend, and there are a few important things to know about this rally. We briefly went below the December yield lows after the CPI report, and the reversal in the midst of the risk-on euphoria since last week might be a reason to be cautious. A sustained break above 4.30 percent in the short term will slow down the risk rally, but we still favour a break lower and a move below 4%. Markets are ultimately driven by stories, and crypto hasn’t had a story for a long time. We’re now hearing both macro and crypto-specific stories that are positive, but the market isn’t set up well because most of the leverage was taken away after Luna and FTX. Of course, nothing is certain, and there is still a lot to figure out, but as we wrote at the start of 2023, things are looking up for Crypto, which has been through a lot in 2022 and is showing great resilience.
