Bitcoin (BTC-USD), ethereum (ETH-USD) and other major cryptocurrencies grinded higher in Tuesday morning trading after consumer price inflation showed signs of easing in July in a move that prompted traders to hedge for less aggressive Federal Reserve interest-rate increases.
The consumer price index for July rose +8.5% Y/Y in July, compared with the consensus of +8.7% and +9.1% in June. The move was greatly due to a decline in energy (oil, gas, diesel) prices from their recent peaks. When stripping out volatile food and energy prices, CPI increased +5.9% Y/Y in July vs. +6.1% expected and +5.9% prior.
The largest digital token by market cap (BTC-USD) jumped as much as 4.3% to a session high of $24.08K about 30 minutes after the CPI release, but has since given up some of those gains, changing hands at $24.05K as of around 9:45 a.m. ET. And ether (ETH-USD) surged 8.7% to $1.83K at the time of writing.
"The fact that inflation has declined will give markets some breathing room over the next month or so, as we have an indication that inflation could have peaked," said GlobalBlock analyst Marcus Sotiriou. "This is also the first bit of good news regarding the macro economy in months, so I think it will be well received, and allow Bitcoin to break above $25,000 in the following weeks."
Similarly, equities gapped up with Dow climbing 1.6%, S&P 500 +1.8% and Nasdaq +2.3%. With bitcoin (BTC-USD) off around 65% from its November peak of $68.9K, the "BTC is an inflation hedge" camp has been relatively quite as consumer prices hover around 40-year highs. On the other hand, some view bitcoin as a gauge for risk appetite and overall sentiment as its relationship with the stock market has been strong in the past year.
"Inflation remains painfully high, but the worst appears behind us. Inflation should moderate in coming months and return to the Fed’s inflation target by spring ‘24. Of course, there are many threats to this inflation optimism, but today is a good day to be an inflation optimist," Mark Zandi, chief economist at Moody's Analytics, wrote in a Twitter post.
Indeed, markets are pricing in softer Fed rate increases at the central bank's upcoming gathering on September 21. Traders are now putting a 60.5% probability of a 50-basis point hike vs. a 39.5% chance of a 75-bp hike, according to CME's FedWatch tool. Just a day before, the probabilities were 32.0% for 50 bps and 68% for 75 bps.
While markets are taking a victory lap following the CPI report, bear in mind that "the Fed will need to see a series of numbers showing inflation is declining before it pivots. The debate for Sept meeting is likely to be 50 vs 75. We have plenty of data between now and then," Kathy Jones, chief fixed income strategist for the Schwab Center for Financial Research, wrote in a Twitter post.
A bunch of crypto-related stocks are catching a bid as well, including Marathon Digital (MARA) +7.4%, MicroStrategy (MSTR) +6.2%, Riot Blockchain (RIOT) +3%, Bit Digital (BTBT) +3.7% and Silvergate (SI) +3.6%. Shares of Coinbase Global (COIN), which posted a Q2 net loss of $1.09B on August 9, also jumped 6.1%, erasing losses seen after its earnings release.
Earlier this week, Bitcoin failed to take $24K for third time in past month ahead of inflation print.