For Bitcoin and the wider crypto market, a week could not have been more crucial! Tuesday will see the release of Consumer Price Index (CPI), at 08:30 ET.
The Federal Open Market Committee (FOMC), will hold its last meeting for the year just one day later at 14:00 ET. The fourth annual update of the forecast for inflation (dot plot) will be presented.
There is generally a base case scenario that Bitcoin will rally if the numbers are higher than expected. Bitcoin could see a new bearish market low if the CPI falls below expectations.
Is Bitcoin reacting too strongly to the PPI?
The most likely scenario can be compared by looking at the latest producer price index (PPI). The PPI was much higher than anticipated.
However, expectations were high. However, the core PPI was expected to fall to 6.7% in October, which is a 0.5% monthly decline.
Core PPI November forecast: 5.9% The actual PPI was 6.2%. While this looks bearish at first, it really wasn’t. However, this still represents a 0.5% drop month-overmonth.
The PPI shows the exact same story. The PPI fell 0.5% and 0.6% for two consecutive months. This was extremely unrealistic as the expectation was for a 1.1% drop in one month.
The markets’ projected target was an extremely low number, and the failure to meet that expectation was, in a sense, an overreaction. However, inflation has declined more than expected.
In the end, expectations were not realistic. Additionally, the PPI is more volatile than CPI, and it also fluctuates seasonally. The Christmas and gift-giving seasons are prone to fluctuations.
A Game Of Expectations
What is the CPI’s outlook? CPI declined 0.5% to 7.7% in Oct, while 8.0% was expected. Tuesday’s expectations are now 0.4% lower. CPI is forecast to be 7.3%
Core CPI expected The October reading was 6.1%. This would indicate a 0.2% drop. The October reading was 6.3%. This is a positive surprise as it was higher than the 6.5% expectation.
Therefore, the forecasts for the CPI as well as the Core CPI are more realistic and moderately optimistic than those for the PPI. The expectations aren’t as high as the PPI.
Even a “small” surprise could be enough to turn the market bullish. On Tuesday, we expect the CPI to rise by 7% in the best case.
Inflation could be confirmed by a new drop in CPI. Fears of a second wave inflation could also be dispelled if the CPI falls for the sixth consecutive month.
All Eyes on The FOMC Meeting
The CPI numbers are crucial for Wednesday’s FOMC decision. The market believes that there is a 78% chance the Fed will slow down the pace of rate rises to 50 basis point at its meeting.
The FOMC press conference is likely to have a greater impact than the economic forecasts and the words of FOMC members.
NewsBTC reported that for the first-time since September, the market would see an updated dots plot. This is a very important piece information.
ING, a bank giant, meanwhile, suggested some possible scenarios that could lead to the market being in risk-off and on modes. ING’s base case is that the Federal Reserve will hike rates by 50 bps, with 5% end 2023.
As the monetary policy works with long & varied lags, ING expects a slowdown in future rate hikes, and clear cuts in 2024. This scenario could give bulls the fuel they need to launch a rally.
As of press time, Bitcoin prices dropped to $16,920 Monday morning in Asia.