The United States Consumer Price Index (CPI) report for July is set to be released on Wednesday, August 12. Economists expect the yearly inflation figure to ease slightly to 3.4%, down from the 3.5% recorded in June.
Following a weak July jobs report, markets have dialed down expectations for another Fed rate hike, giving risk assets and Bitcoin a boost. However, this Wednesday’s CPI report could lock in that dovish view, or reverse it in a flash.
Soft CPI – Potential Bullish Bitcoin Setup
If the CPI report turns out noticeably lower than expected, that would likely be the most bullish outcome for Bitcoin.
The expected sequence would be lower inflation that leads to fewer Fed hike expectations. Such a scenario would send bond yields and the dollar down, while boosting liquidity and risk appetite, which Bitcoin tends to benefit from.
A soft CPI report would reassure markets that inflation hasn’t taken hold, giving the Fed more breathing room to stay on hold or eventually ease up. That kind of environment is usually good for riskier assets, such as Bitcoin.
Generally speaking, leverage is a factor as well, and in case traders are already betting on a dovish CPI, a notably good outcome could spark a rush to open new buy positions. While that might push Bitcoin’s price up faster, it can also overheat the derivatives market.
CPI Comes in Roughly as Expected
This is the most neutral outcome. If the CPI numbers land around what economists expected, the market won’t have a strong reason to change its outlook on the Fed. In other words, yields and the dollar would likely stay steady, and Bitcoin would keep following its current trend.
That doesn’t necessarily mean Bitcoin would stay flat. Markets might still react to details like core CPI, housing costs, services, transportation, energy, and month-over-month inflation figures.
June already gave us a good example, where headline CPI was 3.5% year-over-year, but core CPI (excludes food and energy) was much lower at 2.6%.
Hot CPI – Bitcoin’s Real Test
In this scenario, a Bitcoin rally could become vulnerable. Should July’s inflation come in above forecasts (especially Core CPI), markets might quickly reassess the view that further rate hikes are off the table.
If that happens, higher inflation revives Fed hike expectations, which pushes yields and the dollar up, while weighing on equities and, by extension, Bitcoin. This is relevant because Bitcoin has often traded like a macro-sensitive risk asset.
Just the market reassessing where Fed policy is headed can be enough to hurt Bitcoin.
Related: Bitcoin Faces a Tug-of-War as Whales Accumulate and Bearish Signals Build
