Crypto Markets Analysis: Falling Inflation Expectations Might Signal Bullish Turn for Bitcoin

Consumers' inflation expectations are coming down slowly – possibly removing one potential self-fulfilling prophecy from the list of things the Federal Reserve has to worry about.

AccessTimeIconJan 9, 2023 at 9:29 p.m. UTC
Updated Jan 9, 2023 at 9:57 p.m. UTC

It's not a law of science but an investment thesis: Any increases in digital-asset prices may be driven in part by decreases in physical asset prices.

Bitcoin (BTC) and ether (ETH) started the week in positive territory, up 1.5% and 4%, respectively, on higher than average volume.

The price increases occurred on a day in which the Federal Reserve Bank of New York announced U.S. consumer inflation expectations of 5% for December, versus expectations of 5.2%. The 5% reading marks the second consecutive month of declines, and the lowest reading since July of 2021. Bitcoin and ether prices continue to be impacted by Federal Reserve actions to slow inflation.

The reduction of inflation expectations is a welcome sign for crypto investors placing long bets on either asset.

The expected 5% increase in prices is fairly in line with top Fed officials' expectations for 2023 interest rate levels.

Fed Dot Plot 01/9/23 (CME Group)
Fed Dot Plot 01/9/23 (CME Group)

The narrower spread between price increases and rate levels will be important in stemming inflation. For comparison, the inflation rate in March 2022 was 8.5%, with a then-federal funds target rate of 0.25% to 0.50%.

For bitcoin and ether prices, the sooner the gap between inflation and the federal funds rate narrows, the sooner markets can begin to anticipate a move away from monetary tightening – the impact of which could result in additional price momentum for both.

Bitcoin and ether’s prices moved 0.39% and 0.74% higher, respectively, following the release of the data. Both assets were trading slightly higher, prior to the announcement, but accelerated following the announcement.

Traditional markets were mixed on the data, with the Nasdaq composite trading higher, while the Dow Jones Industrial Average and S&P 500 traded lower.

The relevance of inflation expectations was highlighted during a Jan. 6 speech by Federal Reserve Governor Lisa Cook.

In what can be interpreted as self-fulfilling prophecy concerns, Cook stated, “If cost shocks and supply disruptions keep inflation elevated for a long enough period, households’ and firms’ inflation expectations could move higher – a development that could put additional upward pressure on inflation.”

In short, higher expected prices beget higher actual prices.

Tracking data since the onset of Fed tightening in March 2022, shows consumer inflation expectations taking a labored but steady trend downwards.

Consumer Inflation Expectations (New York Federal Reserve)
Consumer Inflation Expectations (New York Federal Reserve)

The largest decrease in expectations is attributable to gas, falling 5.9% over the prescribed time period. Food price expectations came in second, declining 2.2%

Ultimately, expectations for lower prices can lead to consumers delaying the purchase of goods, which can lead to lower prices, which could lead to increases in available capital to be invested in risk assets like bitcoin and ether.

Ether price trends

Ether has shown increased momentum over the most recent five days. Its Relative Strength Index (RSI) has risen near 70. The RSI is a momentum indicator that can be used to identify both trends, as well as potential overbought/oversold conditions.

It ranges between 0-100, with 30 implying that an asset may be oversold and 70 indicating that an asset may be overbought. Ether has breached the upper range of its Bollinger Bands in four of the last six days. An asset reaches the upper range of Bollinger Bands, is often interpreted as a bullish signal.

Year to date, ether has outperformed bitcoin, rising 5.4% versus the asset.


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Glenn Williams

Glenn C Williams Jr, CMT is a Crypto Markets Analyst with an initial background in traditional finance. His experience includes research and analysis of individual cryptocurrencies, defi protocols, and crypto-based funds. He owns BTC, ETH, UNI, DOT, MATIC, and AVAX