Bitcoin Rises as US CPI Data Falls Below Inflation Targets

• US CPI for July rose 2.7%, slightly below expectations, easing inflation concerns.
• Bitcoin and Ethereum saw significant price movements, reflecting bullish market sentiment.
• CPI data boosts expectations for a Federal Reserve rate cut in September, fueling optimism.

The price of Bitcoin increased slightly after the publication of the US consumer price index (CPI) reports, which indicated inflation at 2.7% year-over-year in July. This represented a slight decrease compared to the economists ‘ expectations of 2.8%. Nevertheless, Ethereum became the most notable performer of the day, rising above $4,400 in a strong rally, followed by the liquidation of nearly $40 million in Ethereum short positions over an hour.

US CPI Data Shows Modest Inflation Rise

On Tuesday, the U.S. Bureau of Labor Statistics published the CPI for July, which recorded a 2.7% inflation rate as compared to June. Although this is lower than the expected 2.8%, the figures nevertheless indicate that inflation remains high. The core CPI, excluding food and energy, rose 3.1%, a quicker climb than estimated. This was the highest growth in the last six months, indicating more inflationary pressures. The statistics also indicated that housing expenses led to inflation, which was the key motivator of the rise in monthly costs.

Market Reaction and Federal Reserve Rate Cut Speculation

In addition, the impact of the CPI report on the crypto market was considerable, with Bitcoin’s modest rise and Ethereum’s impressive rally driving market optimism. Nevertheless, analysts were more concerned with what the Fed would do next, as the market became increasingly confident that the Fed would cut rates by the end of September. The CME FedWatch tool indicates that the probability of a 25-basis-point interest rate reduction by the Federal Reserve during its September meeting is now 94.2%.

This follows a recession in recent job growth data and inflation rates, which have yet to reach the 2% mark being targeted by the Fed. The Federal Reserve has indicated that at least some of its members are ready for a rate cut that would help stimulate economic activity when the labor market has slowed. 

A decrease in interest rates would help to sustain more liquidity in the market, benefiting risk-on assets such as cryptocurrencies. However, some of the members of the Federal Open Market Committee (FOMC), such as the Kansas City Fed President Jeff Schmid, prefer to keep rates steady to prevent adding to inflationary pressures.

Cryptocurrency investors have been watching the likelihood of lowering interest rates because monetary policy has historically been more friendly to riskier investments. A cut in the Fed rate is likely to flood the market with liquidity, thus furthering a bullish sentiment in both conventional and digital assets.

Related: Ethereum ETFs Smash Records with $1.01B Inflows, Outpacing Bitcoin ETF

Impact on Bitcoin and Broader Crypto Market

Bitcoin’s minor reaction to the CPI data was compared to the performance of the entire market. The cryptocurrency market also experienced a notable boost in market capitalization, which recorded a value of $3.94 trillion after the release of data, compared to the previous $3.9 trillion mark. This was driven mainly by heightened Bitcoin and Ethereum prices, though other currencies such as XRP and Solana also experienced price appreciation.

Although the reaction of Bitcoin to CPI data was relatively modest, experts maintain optimistic views about its prospects in the long term. This optimism across the crypto market has been associated with an increasingly high chance of a Federal Reserve rate cut, which previously favored higher-risk-bearing assets, such as cryptocurrencies. As long as inflation hovers above the 2% target, the Fed is likely to keep lowering interest rates, which is beneficial to Bitcoin and other cryptocurrencies.

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