US Inflation Tanks

Bitcoin prices are on watch today after the futures market surged higher yesterday in response to weaker-than-forecast US inflation data. Annualised headline CPI came fell back to 3.5% last month, a sharp drop from the prior month’s 4.2% reading and below the 3.8% the market was looking for. Core CPI also fell by more than expected at 2.6% down from 2.9% prior, below the 2.8% forecast. Finally, the monthly figures were both sharply lower too with core at 0% from 0.2% prior and headline at -0.4% from 0.5% prior.

Market Reaction

The sharper-than-expected drop in inflation has weighed firmly on Fed rate hike expectations. Pricing for a July hike has fallen from around 35% pre-data to just 15% today. While the US Dollar hasn’t fallen heavily in response to the data (likely underpinned by the rising uncertainty around fresh US/Iran fighting), we’ve seen a strong response in risk assets with high-beta FX, stocks and commodities higher today along with crypto.

Near-Term Risks

Looking ahead, there is room for crypto to appreciate further if focus can stay with the dovish repricing in the Fed rates outlook. However, with hostilities between the US and Iran escalating once again, the near-term picture is still fraught with risk. Continued fighting should see oil prices rising further, pushing USD up and turning the inflation outlook more hawkish once again. However, if we see a return to the ceasefire and a re-commitment from both sides to the negotiations process, BTC should start to advance as USD cools.

Technical Views

BTC

For now, the rally in BTC has once again been capped by the 65,380 level though price action around the recent lows is starting to look like an inverse head and shoulders, suggesting room for a break higher. If we do push north here, 69,605 will be the next big test for bulls. To the downside, 62,470 is the key support to watch.