Bitcoin Targets US Inflation Report, Potential Dollar Liquidity Contraction
The Bitcoin crash in mid-May occurred after the United States reported that inflation hit three-year highs.
Bitcoin’s immediate bullish trajectory has weakened following last week’s double-digit price drop. The short-term outlook for the cryptocurrency depends on the US inflation report to be announced on Tuesday.
The leading cryptocurrency by market value is trading 3% lower today, at $ 44,500, having fallen 11% last week. That was the biggest percentage drop in a week since May.
According to Coinbase Institutional, bitcoin’s immediate bullish outlook has weakened, courtesy of last week’s slide, and the cryptocurrency could consolidate between $ 44,000 and $ 48,000 for the time being.
Some charting experts fear a deeper drop, as the price structure now looks similar to that seen after bitcoin’s double-digit drop in the second half of April.
An extended sell-off could materialize if the US Consumer Price Index (CPI) figure for August, scheduled to release at 18:00 UTC Tuesday, is announced above 5% annualized. That could accelerate the Federal Reserve’s plans to begin reducing its purchases of liquidity-boosting assets.
Bitcoin’s mid-May slide from $ 58,000 to $ 30,000 occurred after official data released on May 12 showed that the US CPI was at a three-year high and would trigger downside fears. The sell-off also coincided with China’s crackdown on cryptocurrencies and concerns about the negative environmental impact of cryptocurrency mining.
“Inflation remains the key, as usual, specifically when the base effects will end and the IPC impressions will begin to reflect the true annual image of the Fed,” said QCP Capital on its Telegram channel. “Arguably the worst base effects have already run their course, as reflected in unofficial reports. If inflation still stays above 5% from here, the hawks will surely start to express concern. “
Several members of the Fed have already turned aggressive, indicating their willingness to start reducing asset purchases, or slowing down, this year. Some observers worry that a possible reduction could lead to a substantial drop in the liquidity of the dollar in the fourth quarter, and could coincide with the issuance of more bonds by the United States Treasury to rebuild its coffers (the General Account Treasury, or TGA) after the debt ceiling is lifted.
According to the Wall Street Journal, the US government could run out of cash and hit the debt ceiling between mid-October and mid-November. The Fed is expected to start downsizing around the same time.
“The US Treasury is likely to quickly rebuild the cash balance after the suspension of the debt ceiling, as the new ‘break-even level’ of the TGA appears to be around $ 800 billion. This is a net liquidity withdrawal of almost $ 600 billion compared to the current scenario, which cannot be seen as good news for risk appetite, ”analysts at Nordea Bank said in the published weekly research note. on Friday.
Bitcoin and other traditional risk assets in the market have exploded in the last 18 months, thanks to the liquidity deluge caused by the Fed’s stimulus program, thus a liquidity squeeze due to a reduction of the Fed and the US Treasury stocks could affect asset prices in general and especially in bitcoin because capital in crypto markets is mercenary and tends to overreact, according to Mira Christanto de Messari.
The main investment banks foresee a strengthening of market risk aversion in the coming weeks. According to the Australian Finance Review, Morgan Stanley expects US stocks to fall as much as 15% by year-end, while Bank of America forecasts a 6% drop.
A stock market crash could add to the downward pressures around bitcoin. “The world still views bitcoin as a risky asset,” tweeted Charles Edwards, founder of Capriole Investments. “Almost all bitcoin corrections in 2021 have been correlated with an S & P500 correction of -2% or more.” The S&P 500 fell 1.69% last week along with bitcoin’s 11% drop.
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