Cryptocurrency markets rose today, reflecting market participants' expectations that inflation is cooling ahead of U.S. CPI data.
Crypto markets rise today, bitcoin, Ether, Solana and other altcoins rallied in anticipation of fresh U.S. economic data this week. The cryptocurrency market got off to a hot start to the year, with tokens across the board rallying sharply, pulling it back into 2020.
The moves are based on optimism that inflation is cooling. We saw inflation in Europe fall below expectations last week, falling to 9.2%, below expectations for 9.5%, and down from 10.1% the previous month.
Hopes were revived in the U.K., Europe and the U.S. after raising interest rates by 50 basis points last month, following a 75-basis-point hike last month. The slowdown in growth reflects that while inflation remains high, data suggest it may have peaked - and with both months of positive data, things at least look better than last year.
Here's all there is to hear about cryptocurrencies as prices rise. While the new year is only nine days away, cryptocurrency investors are taking a breather after the apocalyptic 2022. But the important thing is on Thursday, the US CPI data will be released. As has been a monthly routine for the past year or so, the eyes will be glued to the screen for the most important numbers. The weaker-than-expected data could send the market up again.
Disappointing data, on the other hand, could mean worse price action than normal, which is the momentum gained after two straight months of benign inflation data. Markets also rallied last week on the back of the non-farm payrolls report, which investors believe could cause the Fed to pivot earlier than expected.
That said, inflation does remain high and the labor market remains resilient. We'll probably need to see more slack in the latter, with a notable drop in demand, before the Fed eases back on its promise that it will do whatever it takes to raise rates to oblivion and nuclear inflation.
Either way, the market could be volatile in the week ahead. The crypto market has actually been relatively quiet since the FTX crash in early November. I charted the volatility before Bankman-Fried revealed his true colors to the world, and it clearly shows a rise in volatility followed by a fall in mid-December. So, barring a few isolated incidents, cryptocurrencies have recovered to where they were for most of last year and that was after the stock market.
After Thursday's CPI reading, the next key date is February 1. That's when the next FOMC meeting takes place, or in other words, when the Fed announces its plans for its latest rate hike.
Federal Reserve Chairman Jerome Powell is the most important figure in the market right now, and his every word will command attention as he gives his thoughts and guidance on what's to come next. Last year, the Federal Reserve raised interest rates seven times as it became clear that inflation was a problem that could not be ignored.
Core inflation figures are arguably more important than headline numbers. Core inflation strips out volatile food and energy prices, which are considered less affected by monetary policy. Typically, this is a number that policymakers often focus on.
With natural gas prices falling sharply since last year, CPI data will get a boost as these higher readings will disappear from the index with an additional month of data. Therefore, central figures may have greater importance. Regardless of the number, however, the crypto market will be watching it closely to decide whether to continue its 2023 rally.
