Crypto prices have maintained a strong correlation with most macro factors. It is no longer debatable that inflation affects the trend of the crypto market. Most of the past declines in digital assets have their origins in the shift in the global economy in general.
The intensity of the crypto winter in the first half of the year had built up potential inflation strength. However, due to suspicions of rising inflation in the economy, crypto prices have shown signs of falling. Recent CPI data even pushed the market into another red region.
The consumer price index (CPI) is an economic indicator that measures inflation by changes in the cost of goods and services. The percentage increase in the CPI over a given period provides the economy’s inflation rate for the given period.
However, the July report provided some relief as the CPI noted virtually no impact on inflation. With the positive significance of July news about the crypto industry, a lot of hope has become high. Many participants expected a more favorable outcome for August, but their expectations were disappointed.
CPI data is below crypto community expectations
Finally, the CPI report published in August contradicts the expectations of the crypto space. The result revealed a change of 0.1% MoM and a change of 8.3% YoY, indicating an erroneous value for the industry. The crypto market had estimated the CPI at -0.1% MoM and 8.1% YoY. Moreover, compared to the expected core CPI of 6.1%, the real value is up 6.3% year-on-year.
With the result of the CPI data, prices in the crypto market started to drop. Bitcoin and Ethereum take the news badly as BTC and ETH fell.
The action of crypto assets on the CPI data is not surprising. This is due to the impact of inflation on the volatility of cryptocurrencies. When formulating its monetary policy, the Federal Reserve always takes the CPI into account.
Currently, the Fed is using a hawkish approach as an inflation control measure in the United States. But, according to Fed Chairman Jerome Powell, the Fed’s stance on controlling inflation will hurt businesses and homes.
A potential rise in interest rates could hit the market
Seeing the CPI data deteriorating means more aggressive braking actions from the Fed. A better report would have eased the Fed’s tightening measures. According to the CME Fed Watch tool, the Fed could impose an interest rate hike of around 75 basis points. Such a rate hike is a sad story for crypto asset prices.
As hopes for a potential rescue in the crypto market dwindle, some hands are pointing to Ethereum upgrading. The merger holds promise in the industry and could facilitate price increases in the future.
But many traders have no confidence in the success of the upgrade. Therefore, the crypto market could have no practical savior.
Featured image from CNBC, chart from TradingView.com