Bitcoin Holds Above $60K as Markets Brace for Key Inflation Test

Bitcoin is recovering slightly and trades around 61.7K at the time of writing after falling to a yearly low near 59.1K in the previous session. 

The largest cryptocurrency is down 1.5% over the past 24 hours and has fallen more than 4% over the past week. Major altcoins are also under pressure, with Ethereum down 1% on the day and 5.5% over the past seven days. 

The bearish price action reflects a combination of U.S. dollar strength, increasingly hawkish Federal Reserve expectations and continued institutional selling. 

The U.S. dollar remains at a 13-month high, and dollar strength has historically been a headwind for Bitcoin. The greenback’s rally has been driven by a sharp repricing of Fed expectations following last week’s FOMC meeting under new Chair Kevin Walsh. 

Markets are now pricing a 33% probability of a July rate hike and a 70% chance of a September move. Some investors are even starting to price the possibility of as many as three rate hikes this year, a dramatic shift from expectations of one rate cut before last week’s meeting. 

Higher interest-rate expectations lifted Treasury yields and the U.S. dollar last week, reducing liquidity and weighing on risk assets such as Bitcoin. In effect, markets have shifted their focus away from geopolitical risks and back towards monetary policy. 

Attention now turns to today’s Core PCE data, the Fed’s preferred measure of inflation. Expectations are for Core PCE to rise to 3.4% year-on-year in May from 3.3% previously. 

A hotter-than-expected reading would likely reinforce expectations of further Fed tightening, supporting the U.S. dollar and weighing further on Bitcoin. Conversely, a softer reading could ease rate hike expectations and offer some relief to risk assets at least near term. 

When Could Bitcoin Turn a Corner? 

There are, however, some early signs that the macro backdrop could begin to improve. 

Oil prices have fallen to a four-month low following the reopening of the Strait of Hormuz and the temporary sanctions waiver allowing Iranian crude exports to resume. As a result, inflation pressures could begin to ease in the months ahead. 

That shift may already be starting to filter through markets. The U.S. 10-year Treasury yield has slipped from 4.5% earlier this week to around 4.4%, suggesting investors are becoming slightly less concerned about future inflation. 

If lower energy prices continue to feed through into inflation data, the current hawkish repricing of the Fed could begin to moderate later in the third quarter, potentially easing one of Bitcoin’s biggest headwinds. 

Seasonality also favours patience. Q3 is historically the weakest quarter for Bitcoin, while Q4 has typically delivered the strongest returns. That timing also coincides with key Federal Reserve meetings and the U.S. midterm elections, meaning the backdrop for crypto could become more supportive later in the year. 

Institutional Selling Intensifies 

Institutional demand remains the biggest concern. 

According to SoSoValue data, spot Bitcoin ETFs recorded net outflows of $469 million on Wednesday, marking a third consecutive day of outflows. ETFs are now on track for a seventh straight week of net redemptions, extending a trend that began in mid-May. 

Although ETF selling has slowed from the peak seen earlier this month, sustained inflows are likely to be needed before Bitcoin can establish a more durable recovery. Until institutional demand stabilises, rallies may continue to struggle to gain momentum. 

Bitcoin appears caught between a potentially improving inflation backdrop as oil prices fall and a still-hawkish Federal Reserve. Until that balance shifts, rallies may continue to attract sellers. 

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