- US inflation is expected to remain at 3.4% YoY
- The Fed is expected to leave rates unchanged
- Policymakers could point to fewer rate cuts this year
- A lower interest rate environment is more beneficial for Bitcoin
- Could this be a buy-the-dip opportunity?
Bitcoin is falling on Wednesday extending losses from the previous session as risk appetite takes a hit ahead of the Federal Reserve interest rate decision later today and key inflation data.
Bitcoin fell 3% yesterday, its worst daily performance in over a month. US-listed Bitcoin exchange-traded funds (ETFs) posted a second day of outflows as traders derisked ahead of today’s crucial macro report and Fed meeting.
Data showed that the 11 approved BTC ETFs recorded $200 million in net outflows on Tuesday, the highest level of outflows since the start of May. Outflows came as Bitcoin briefly spiked lower to $66,200 before recovering.
Attention is now firmly on US inflation data (CPI), which will be followed a few hours later by the Federal Reserve interest rate decision.
US inflation data
Economists expect US inflation to remain unchanged at 3.4%YoY in May, in line with April’s reading. On a monthly basis, inflation is expected to rise just 0. 1% MoM after rising 0.3% in the previous month. Meanwhile, core inflation, which excludes more volatile items such as food and fuel, is expected to rise 0.3% MoM.
A downward revision to the dot plot?
Attention will then turn to the Federal Reserve interest rate decision, which will be one of the most pivotal meetings this year. US policymakers are expected to leave interest rates unchanged at a 22-year high for a seventh straight meeting. With no change expected, the focus will be on the Fed’s policy statement, updated projections, and the dot plot, as well as the press conference by Federal Reserve chair Jerome Powell.
Hotter-than-expected inflation data since the projections were last updated in March could prompt a downgrade to the number of interest rate cuts that policymakers are expecting this year. The dot plot, which records the number of rate cuts expected, is likely to be lowered to two or even one cut from three cuts expected back in March. However, today’s inflation data, which is to be released during the meeting, could still influence the dot plot.
When will the Fed start to cut rates?
The market will be looking for clues about when the FOMC could start cutting interest rates. While the post-policy statement is likely to say that policymakers will want to see more evidence that inflation is moving towards its 2% target, Fed Chair Powell may give away more clues in his press conference. A more hawkish-sounding Powell could hurt the market mood.
Currently, the market is pricing in just a one-25 basis point cut this year, with the first rate cut fully priced in for December. This has been pushed back from November following Friday’s stronger-than-expected number on the payroll report.
A lower interest rate environment is more beneficial for risk assets such as Bitcoin, given it improves liquidity conditions.
Buy the dip?
Despite the short-term headwinds, the recent fall in Bitcoin could be a good buying opportunity. Some bullish events are on the horizon, such as the start of ETH ETF trading and both Biden and Trump looking for the crypto vote as we move toward US elections later this year, which could help boost lift Bitcoin over the medium term.
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