U.S. CPI and Fed Meeting: Things to Watch Out as BTC Nurses Losses

As a researcher with extensive experience in financial markets, I believe that Wednesday’s release of the U.S. consumer price index (CPI) report and the Federal Reserve’s (Fed) meeting could significantly impact both the dollar index and bitcoin.

On Wednesday, the consumer price index report from the United States, which holds significant importance for financial markets, will be unveiled. This revelation comes mere hours prior to the Federal Reserve’s scheduled meeting, making it a potentially decisive day in market trends.

At 12:30 UTC, the Consumer Price Index (CPI) from the Labor Department is anticipated to indicate a 0.1% rise in the cost of living during May. This follows the 0.3% increase recorded in April, as reported by FactSet. Consequently, the yearly inflation rate would remain unchanged at 3.4%. Additionally, the core CPI, which excludes the fluctuating food and energy prices, is predicted to climb 0.3% in May, consistent with the previous month’s growth rate.

At 18:00 UTC in the future, the Federal Reserve is anticipated to maintain the base interest rate around 5.25%-5.5%, without adjustment. Additionally, they will release the “dot plot” chart depicting individual Federal Open Market Committee members’ projections for future interest rates. The upcoming inflation data will significantly impact these forecasts and Powell’s subsequent statement following the meeting.

Here are key things to watch out for that could influence the dollar index and bitcoin.

Core inflation, rent price growth

Per investment banks, the risk for the core CPI is to the downside.

I expect the rate of growth for core prices, excluding food and energy, to decrease slightly from 3.6% in April to 3.5% this month. This is predicted on the basis of a modest 0.2% rise in prices from the previous month. Furthermore, home rent price growth is anticipated to decelerate along with a smaller increase in the core services ex-rent measure, which is closely monitored by Federal Reserve policymakers.

According to ING’s economic analysis, some experts predict that the Owner’s Equivalent Rent component, which accounts for 40% of the core Consumer Price Index (CPI) basket and represents the cost of housing imputed as rent, may decrease eventually.

As an analyst, I believe that potential relief from rising shelter prices, which has been a significant contributor to inflationary pressures recently, could fuel expectations of Federal Reserve interest rate cuts. This expectation, in turn, might lead to a weaker US dollar. Historically, a declining dollar has tended to boost the performance of risk assets such as Bitcoin.

The dollar will likely surge if the month-on-month core CPI tops 0.4%, according to JPMorgan.

Bitcoin has experienced a downturn since last Friday, dropping approximately 5% and currently hovering around $67,350 based on CoinDesk’s figures. Meanwhile, the dollar index, which measures the USD’s strength against key currencies, has climbed by 1%, reaching a value of 105.20.

Fed statement

As an analyst, I would interpret the current situation as follows: The decision to keep interest rates unchanged is a strong probability, and the interest protection chart will likely reflect only two rate cuts in 2021 instead of the previously anticipated three. Following the unexpectedly robust employment data reported on Friday, financial markets have adjusted their expectations accordingly, reducing the likelihood of more than two rate reductions this year.

As such, the focus will be on the central bank’s take on the inflation trajectory.

If the Federal Reserve were to eliminate the phrase “in recent months, there has been a lack of further progress toward our 2% inflation target” from its statement, it could lead to a decline in short-term U.S. Treasury yields and the value of the dollar, according to ING’s assessment in a note to clients.

At the past four Federal Open Market Committee (FOMC) meetings, Chair Powell has given press conferences that are considered dovish in tone, resulting in a decline in the dollar’s value on those days. According to ING, it would take an unexpectedly high 0.4% monthly increase in core Consumer Price Index (CPI) data or a more hawkish Powell for the DXY index to reach the 105.90/106.00 range. However, this outcome is considered unlikely by ING.

Bitcoin’s price has a tendency to dip before Federal decisions this year, followed by a continuation of upward trends once those decisions have been made.