Bitcoin prospects hinge on upcoming US inflation report
- The top crypto by market cap dropped by 11% last week
- If the US CPI figure for August is above 5% p.a., an extended sell-off could materialize
- Fed members indicate willingness to start the taper as early as this year
After a double digit price drop last week, Bitcoin’s (BTC/USD) immediate bullish trajectory has weakened and its prospects will be determined once the US inflation report is published. This will happen on September 14. The top crypto by market cap dropped by 11% last week. Since May, that has been the biggest drop in a single week, Coindesk reported.
Given that Bitcoin’s price structure is now similar to the one after the big drop in April, experts fear an even greater decline. If the US CPI figure for August is above 5% p.a., an extended sell-off could materialize. That could accelerate the Federal Reserve’s plans to start scaling its asset purchases back, aimed at boosting liquidity.
Taper fears caused last big price drop
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In the middle of May, Bitcoin lost $28,000 in value after the CPI showed a three-year peak. Concerns over mining’s negative environmental impact and China’s crackdown on mining exacerbated circumstances further. QCP Capital commented:
“Inflation remains the key as usual – specifically when base effects will end & CPI prints begin to reflect the true year-on-year picture for the Fed. Arguably, the worst of the base effects have now run its course. If inflation still remains above 5% from here, the hawks will surely start expressing worry.”
This is already starting. A few Fed members indicated willingness to start the taper as early as this year. However, observers fear a possible taper might cause a decline in dollar liquidity in the fourth quarter. After lifting the debt ceiling, the treasury might start issuing more bonds to rebuild its TGA, which will coincide with liquidity loss. The government might also reach the debt ceiling in the last quarter of the year because it has no money. Analysts at Nordea Bank said:
“The U.S. Treasury will likely quickly rebuild the cash balance after a debt ceiling suspension as the new ‘equilibrium level’ of the TGA seems 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.”