Cooling inflation data in the United States has strengthened market expectations that the Federal Reserve will hold rates steady this month, boosting risk assets. Bitcoin broke above $64,000 on Tuesday, while Ethereum posted even stronger gains.
Analysts suggest that easing inflationary pressures driven by energy prices provide a favorable backdrop for digital assets, although geopolitical tensions in the Middle East could still influence the market's direction.
Data released by the U.S. Bureau of Labor Statistics on Tuesday showed the Consumer Price Index (CPI) fell 0.4% month-over-month in June, a larger drop than the market's 0.1% forecast and the largest monthly decline since April 2020. On a year-over-year basis, CPI growth slowed to 3.5%, marking the first deceleration in nearly five months. The core CPI, which excludes food and energy, rose 2.6% year-over-year, down from 2.9% in May and also better than expected, indicating a further moderation in underlying inflation pressure.
Buoyed by the data, Bitcoin climbed above $64,000 and was trading around $64,500 later in the day, up over 4%. Ethereum outperformed with a gain exceeding 6%, rising to approximately $1,890.
Fabian Dori, Chief Investment Officer at crypto bank Sygnum, stated that the latest inflation figures are a positive signal, suggesting that the inflationary pressure driven by energy price increases this spring is gradually receding rather than spreading more broadly, which is constructive for the cryptocurrency market.
Previously, escalating tensions in the Middle East had tightened global energy supplies, raising market concerns that rising energy costs could push overall inflation higher and potentially force the Federal Reserve to tighten monetary policy further.
However, following the release of the latest inflation data, market confidence in the Fed holding rates steady has strengthened. According to the CME FedWatch Tool, traders have significantly increased their probability for the Fed maintaining the federal funds rate target range at 3.50% to 3.75% at its policy meeting later this month.
Nonetheless, the market still widely expects the Fed to implement a 25-basis-point rate hike in September. Generally, higher interest rates enhance the appeal of risk-free assets like U.S. Treasuries, putting pressure on risk assets such as stocks and cryptocurrencies. Conversely, expectations for looser monetary policy often support digital asset prices.
Analysts caution, however, that the Middle East situation remains a significant variable for the market. As conflicts escalate among the U.S., Israel, and Iran, considerable uncertainty persists regarding the Fed's future policy path for controlling inflation.
Matt Mena, Senior Crypto Research Strategist at 21Shares, noted that if the situation with Iran does not worsen, the fundamental backdrop and catalysts for the cryptocurrency market are gradually improving, and Bitcoin could potentially challenge the $100,000 level by the end of this quarter.
Meanwhile, reports indicate the U.S. military planned to reinstate a maritime blockade of Iranian ports on Tuesday. With ongoing military actions between the U.S. and Iran centered on control of the Strait of Hormuz, geopolitical risks could still cause disruptions across global financial markets, including cryptocurrencies.
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