As Bitcoin became a more mainstream asset, its correlation with the stock market rose which meant it has been impacted by world events to a higher degree than it did before. This is evident with the asset’s reaction to the rising inflation and the Fed’s continuous hiking of interest rates.
However, there seems to be a reversal in this trend as inflation is starting to ease. This means the Fed could change its stance on interest rates soon. If this happens, what does it mean for Bitcoin?
Looking Toward The CPI Data Release
In the Matrixport Daily Insights report released on Tuesday, Head of Research Markus Thielen outlines a bullish case for Bitcoin as inflation slows down. He starts out by explaining the expectation that inflation is going to fall further which would be a good thing for risk assets such as BTC.
The inflation Matrixport forecast for the year 2023 puts it below 2% before year’s end, which would be an over 50% reduction. Such low CPIs would no doubt see the Fed reverse interest rates, dropping them significantly. In fact, the report projects interest rate cuts of up to 100 bps.
“Hedge Funds remain massively hedged equities. The CFTC data for S&P500 positions is equivalent to levels only seen during the 2008 financial crisis and the European Debt crisis in 2011,” the report said. “While this does not necessarily mean that Hedge Funds are short, it indicates that hedge funds have sold those contracts and will have to cover them at some point. This buying will squeeze prices higher.”
Matrixport predicts sub-2% inflation by end of year | Source: Matrixport
If inflation were to fall as low as predicted, then the price of BTC would rally toward the $40,000 level before the end of 2023.
As for the current Bitcoin price and how to play the market, the report further adds that “A stop loss of $27,000(-3%) could offer great risk/reward with the macro data being released soon,” pointing to the CPI data being released on Wednesday, May 10.
Bitcoin Sellers Hold Market Hostage Ahead Of CPI Release
With less than one day left to the CPI data release for May, Bitcoin sellers are currently dominating the market. As a result, the digital asset fell to the mid-$27,000 level where it currently trending. This is also understandable as investors tend to move their holdings into stables leading up to important events like this as it can trigger high volatility in the market.
This decline in price has driven BTC below its 20-day simple moving average (SMA) and puts it dangerously close to its 50-day moving average. If the digital asset were to fall below the latter, it could be disastrous as it would solidify the bears’ hold on the market, further driving down the price.
BTC price returns to mid-$27,000 | Source: BTCUSD on TradingView.com
Further downside from here could see BTC return to $26,000 where the next significant support level lies. Thus, it is important that the CPI data comes out with a lower inflation rate and the Fed moves from hawkish to dovish. Otherwise, risk assets such as BTC and the total cryptocurrency market could see a rapid decline.