Bitcoin Set to Benefit from Soft U.S. CPI, but Major Surge in BTC Unlikely

Key Insights:

The U.S. inflation report for January is expected to show minimal improvement.
Positive CPI figures may attract investments in riskier assets, though potential for a substantial rise remains capped.
BlackRock and RBC predict the CPI results will not sway the Federal Reserve’s rate decisions.

A soft U.S. inflation report expected later today is likely to favor risk assets, including bitcoin (BTC). However, expectations for a significant price increase might be tempered.

The Labor Department is set to release the January consumer price index (CPI) report at 13:30 UTC, which is projected to reveal a 0.3% month-over-month increase in living costs, easing from December’s 0.4% rise, according to estimates from FXStreet. The annual figure is likewise anticipated to align with December’s reading of 2.9%.

Also, core inflation, excluding volatile food and energy prices, is expected to rise to 0.3% month-over-month from 0.2%, leading to an annualization of 3.1%, down from the preceding month’s 3.2%.

Subpar data, especially for the core figure, may heighten expectations for further interest rate cuts by the Federal Reserve (Fed), which could diminish Treasury yields and lower the dollar index, ultimately boosting demand for riskier assets. The market currently estimates a 54% probability that the Fed will either not cut rates or only implement one cut this year.

However, while adjustments in Fed rates might benefit BTC, they are unlikely to drive a breakout from the ongoing trading range of $90,000 to $110,000.

Concerns about future inflation are growing, as related metrics suggest a challenge for the Fed in executing aggressive rate cuts amid potential trade tensions. Data from Mott Capital Management illustrates that inflation swaps are approaching the highest levels seen in early 2023, implying that markets foresee a rise in inflation rates in the near future, encouraging investors to engage in swap contracts against potential purchasing power erosion due to inflation.

Additionally, opinions from prominent investment banks suggest a soft January CPI won’t sway the Fed towards relaxing its aggressive rate strategy. In recent remarks, Chairman Jerome Powell confirmed there’s no rush to cut rates.

Final Thoughts

Should today’s CPI report show inflation receding slower than anticipated, BTC might drift towards the lower range of its current $90K-$110K trading corridor.