fxstreet.com
- While the Fed is not ready to flicker in its inflation outstare, rate hikes are about to peak.
- Economists expect a modest cooling in inflation pressures for the month, with the headline CPI rate easing to 0.3%.
- Meanwhile, Bitcoin has topped $30,000 for the first time since June, while Ether nears $2,000.
As we approach the release time of the US Consumer Price Index (CPI) figures scheduled for April 12 at 12:30 GMT, the US Bureau of Labor Statistics (BLS) will release the most important inflation measure.
The Federal Reserve is presumably approaching the end of its rate-hiking cycle, and traders are looking for one last increase to the benchmark Fed Funds rate in May in Washington. The move is expected to remain unaffected by the inflation report scheduled for April 12, one of the most anticipated events thus far.
Bitcoin price could benefit from a CPI that gives Fed reason to rethink rate hikes
Now that Bitcoin price (BTC) has breached $30,000, a move into the mid-to high-30s will be "possible". This depends o whether the flagship crypto can push through with determination and would compel short speculators to cover and buy instead.
Presumably, traders hope that Wednesday's CPI number could come in at a level that gives the Fed reason to consider pausing raising rates in the next meeting. If this happens, it could boost assets such as BTC.
Cryptocurrencies have recorded a notable rally in the first quarter of 2023, with the actions on April 10 bringing Bitcoin's year-to-date gains to over 80%. While Ethereum (ETH) has now added 60% this year. Historically, the price moves for the two leading cryptos have been tracked relatively in conformity with a percentage basis. However, BTC and ETH "decoupled" in March after a "flight to quality" in Bitcoin amid bank closures.
The upcoming inflation data will play a vital role in determining if or when the Fed will halt or end its rate-hiking campaign. Meanwhile, Ethereum has been rallying ahead of its planned Shanghai/Capella upgrade (Shapella), expected to deliver a wave of negative selling pressure on the crypto market. This comes as previously locked funds on Ethereum will be released over the next few weeks.
Changes could have less impact on Fed’s May rate decision
According to economists, there will be a subtle cooling in inflation pressures for the month, with the headline CPI rate easing to 0.3%. Notably, this will be around 50% of the pace of gains that was witnessed in February. It would also be a 5.2% pace on the year, stretching its run of declines to six consecutive months.
Additionally, there is speculation that there will be more stickiness to the reputed ‘core inflation’, known for stripping out volatile food and energy components. Based on expert predictions, this could ease by a meager amount from the levels recorded last month and the previous year at 0.5% and 5.5%, respectively.
Nevertheless, the changes are not likely to gravely influence the Fed's rate decision come May. This is mainly because of last week's employment report that recorded a stark gain of 236,000 net new jobs. The turnout was a correction in the headline unemployment rate to 3.5%. It was also a pullback from the month-on-month wage gains of 0.3% while matching the 0.3% gains recorded over January and February and conforming to the consensus prediction by Wall Street.
According to the CME Group's FedWatch, a 70% chance of a May rate hike could usher the Fed Funds rate to the 5% - 5.25% range once the Fed completes its two-day policy meeting slated for May 3. As regards June, the odds of a pause stand at 61.5%.
Noteworthy, the expectations of the broader marker were thrown out of the window on April 10 when data from the New York Fed’s closely-monitored Survey of Consumer Expectations revealed a year-ahead inflation prediction leaped by 50bps to 4.7% in March. With this, market players identified the tightest overall credit conditions in almost a decade (since 2014). This was in the wake of the Silicon Valley Bank (SVB) shutdown and the subsequent toppling of Signature Bank.
Issues that could influence the Fed’s inflation challenge
Among the problems that could weigh on the Fed's inflation challenge is the “influence that OPEC's recent production cuts are likely to have on oil and gas prices over the coming months.” This is because OPEC members joined Russia in supporting an additional 1.66 million barrels of oil from the cartel's total daily output.
With such an agreement, OPEC+, Russia included, will take almost 3.4 million barrels of crude from the market daily, translating to approximately 3.7% of daily global demand. On the other hand, US oil prices have spiked by almost 8% since OPEC‘s oil cut decision. As a result, the local gas prices have soared by nearly $0.088 (8 cents), averaging around $3.57 per gallon.
Secondly, the "broader economic weakness" could also affect the Fed’s decision. This factor could add further downward pressure on inflation predictions and force the Fed to reconsider its longer-term rate strategy.
Nevertheless, the Fed continues its fight against inflation while the economy slows down. It will likely increase the rates at the next meeting. Still, if the economy’s stability continues to wane, the Fed could hinge to rate cuts by the end of 2023.