Bitcoin Posts Best Gain in Nearly a Month as US Inflation Miss Calms Rate Hike Jitters

The US consumer price index (CPI) fell a seasonally adjusted 0.4% in June from the previous month, bringing the annual inflation rate to 3.5%, according to data released by the Bureau of Labor Statistics (BLS) on 14 Jul. Economists had expected a 0.2% monthly decline and an annual rate of 3.8%.

Bitcoin (BTC) was up about 4% over the previous 24 hours, trading at $64,703 at 15:36UTC. Ether (ETH) rose even more, gaining 6% to $1,881. The total cryptocurrency market capitalization increased 2.4% to $2.29tn.

Cooling data

Lower inflation can be positive for digital assets because it may reduce expectations for higher interest rates. In turn, lower rates tend to encourage investors to buy riskier assets such as cryptocurrencies. The current target range for the federal funds rate is set at 3.50% to 3.75%.

The June inflation report came as recently-appointed Federal Reserve Chair Kevin Warsh reiterated the central bank's focus on bringing inflation back to its 2% target.

While testifying before the House Financial Services Committee on 14 Jul, Warsh said the Fed has "no tolerance for persistently elevated inflation."

"If we get policy right – and I can assure you we will – the inflation surge of the last five years will be a thing of the past," he added.

CME FedWatch, a market gauge of expected US interest-rate moves, reflected the alleviated concerns, with traders on 14 Jul assigning an 83.4% probability to the Federal Reserve holding rates steady on 29 Jul, up from 58.3% a day earlier. The implied chance of a 25-basis-point increase fell to 16.6% from 41.7%. Polymarket participants were more confident that rates would remain unchanged, placing the probability at 94%, compared with a 6% chance of an increase.

Too soon to tell

Sygnum Chief Investment Officer Fabian Dori said in comments shared with Sandmark that while the report is an encouraging sign, it is still too early to conclude that inflation is under control.

"A softer core print is the first real indication that the energy-driven impulse from the spring is fading rather than broadening," said Dori. 

The energy index dropped 5.7% from the previous month, its biggest monthly decline since April 2020, with gas and fuel oil prices each falling by more than 9%. However, the energy index was still 15.7% higher than a year earlier.

"But this is a print-by-print, data-first Fed under Chair Warsh, one deliberately giving less forward guidance," Dori noted. "So a single cooler month lowers the temperature without yet changing the destination."

Dori explained that the producer price index (PPI), which measures changes in the prices received by domestic producers, will be especially important in showing whether inflation is continuing to ease when it is published on 15 Jul.

"For Bitcoin and digital assets, a genuine turn lower in inflation is the more constructive backdrop," he said. "It reduces rate-hike expectations, softens the dollar and real yields and, given Bitcoin's high beta to liquidity, improves the odds that ETF flows turn from outflows back to modest net inflows over the summer."

Today's data comes one day after Federal Reserve Governor Christopher Waller said on 13 Jul that policymakers may need to raise interest rates if inflation remained stubbornly high.