Amid news and rumors of a harsh crackdown of the crypto sector by U.S. authorities, the Bitcoin and crypto market is facing a crucial turning point today with the release of the U.S. Consumer Price Index (CPI) for January 2023. The release by the U.S. Bureau of Labor Statistics will take place at 8:30 A.M. Eastern Time (EST).
The Bitcoin price – the leading indicator for the overall crypto market – is just above its key support zone and could face extremely high volatility today. Thus, today’s CPI could be a turning point for the crypto market in its uptrend, if there is a nasty surprise.
How Will Bitcoin React To CPI?
The broader financial market has seen a meteoric rise since the beginning of the year, fueled by dreams of falling inflation and the possibility of interest rate cuts by the U.S. Federal Reserve. But given the new weighting of the various components in the CPI and the annual reference, forecasting is more difficult than ever.
Accordingly, the CPI report is causing even more excitement than usual among traders and investors. Expert expectations are for headline CPI to rise 0.5% month-on-month and 6.2% year-on-year, with the latter expected to decline from 6.5% in December.
Core inflation is expected to rise 0.4% month-over-month and 5.5% year-over-year (down from 5.7%). The fear is that a high inflation rate in January could prompt the U.S. Federal Reserve to raise interest rates even higher than projected and keep them at this level for longer.
Thus, the starting point is clear: If the CPI is below expectations, Bitcoin and crypto will see an uptick that will be more or less depending on the magnitude of the CPI. Any disappointment, a CPI above expectations, is likely to trigger a sell-off as the Fed gets more leeway to raise rates.
Meanwhile, the forecasts of individual market participants diverge widely, mainly because the impact of several changes in the calculation is difficult to gauge. While the market consensus is 6.2%, the Cleveland Fed estimates 6.48%, Kalshi 6.6% and Truflation 5.8%.
Remarkably, Truflation has been spot on the last few times. The previous YoY forecasts for US CPI were October 2022: 7.7% (actually 7.7%), November 2022: 7.4% (actually 7.1%), and December 2022: 6.5% (actually 6.5%).
Among the major banks, the estimates also diverge, in some cases sharply. While Bank of America forecasts 6.1%, Goldman Sachs predicts 6.4%. In the middle are Credit Suisse, JP Morgan and Wells Fargo with 6.2%.
JP Morgan’s gameplan for the S&P 500, with which Bitcoin has been highly correlated over the past 18 months, is as follows: The base case (with a 65% probability) sees January CPI between 6.0% and 6.3%, which could trigger a 1.5% to 2% upside move in the S&P 500.
The second most likely case, according to JP Morgan, is a CPI of 6.4% or 6.5%, which could push the S&P 500 down 0.75% to 1.5%. Both other scenarios (above 6.5% and below 6.0%) have only a marginal probability of 5%, according to the banking giant.
Cpi impact on market expectation by Jpm ✍🏼 #cpi #fed #SPX500 #fx #futures pic.twitter.com/X5cSOIQcOZ
— CosmoNode 🛸 (@cosmo_node) February 14, 2023
For Bitcoin, the most likely scenario could trigger an even bigger uptrend as the crypto market is more volatile. In any case, investors should prepare for just that – a volatile Valentine’s Day.
At press time, the Bitcoin price was trading at $21,739, holding above the crucial support area between $21,400 and $21,600.
Featured image from iStock, Chart from TradingView.com