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A week couldn’t be more important for Bitcoin and the broader crypto market! On Tuesday at 08:30 ET, the consumer price index (CPI) will be released.
Just one day later, on Wednesday, December 14 at 2:00 PM ET, the Federal Open Market Committee (FOMC) will hold its final meeting of the year. For the fourth time this year there will be an updated forecast for inflation and interest rates (dot plot).
In general, there is a simple base case: if the numbers are better than expected, there will be a rally for risky assets like Bitcoin. If the CPI falls short of expectations, Bitcoin could face a new bear market low.
Has Bitcoin overreacted to the PPI?
To assess how likely both scenarios are, it’s also worth looking back at the recent release of the producer price index (PPI). The PPI was higher than expected.
However, expectations were relatively high. Core PPI was forecast at 7.2% in October, but actually fell to 6.7%, down 0.5% month over month.
The core forecast for November was 5.9%. In reality, however, the PPI came out at 6.2%. While this may seem bearish at first, it really wasn’t. This still represented a 0.5% month-on-month decline.
The PPI shows the same story. The value fell for two consecutive months, 0.5% and 0.6%. The expectation was a drop of 1.1% in one month, which was extremely unrealistic.
The expected target of the markets was an extremely low number, and failing to meet that expectation was, in a sense, an overreaction. Inflation has continued to fall significantly, slightly less than expected.
In the end, expectations were a bit out of touch with reality. In addition, the PPI is fundamentally more volatile than the CPI and also fluctuates seasonally. With the Christmas and gift season, fluctuations are not uncommon.
A game of expectations
So what are the expectations for the CPI? The CPI fell 0.5% to 7.7% in October, compared to 8.0% forecast. Expectations for Tuesday are now 0.4% lower. The predicted CPI is 7.3%.
Core CPI is expected at 6.1%, which would represent a decrease of 0.2%. The reading in October was 6.3%, while the expectation was 6.5%, which resulted in a positive surprise.
The forecast for the CPI and the Core CPI are therefore much more moderate and less unrealistic than for the PPI. Unlike the PPI, there are no extremely high expectations.
Even a “little” surprise can be enough to turn the market bullish. At best, we see a figure of around 7% for the CPI on Tuesday.
In addition, a renewed fall in the CPI could confirm that inflation has peaked. If the CPI falls for the sixth month in a row, fears of a second wave of inflation would also have been allayed for the time being.
All eyes on the FOMC meeting
Last but not least, the CPI numbers will be quite crucial to Wednesday’s FOMC decision. The market has priced in a 78% probability that the Fed will slow the pace of rate hikes to 50 basis points at that meeting.
However, the words spoken at the FOMC press conference are probably even more important, as are the forecasts of updated economic projections.
For the first time since September, the market will see an updated dot chart, an extremely important piece of information, like NewsBTC reported.
Banking giant ING, meanwhile, has laid out a number of possible scenarios that could put the market in risk-off or on mode. ING’s base case scenario is that the Federal Reserve raises interest rates by 50 basis points, by 5% by the end of 2023.
As monetary policy operates with long and varied lags, ING expects a slowdown in future rate hikes and marked cuts in 2024. This scenario could give the bulls the powder they need to rally.
At the time of writing, the price of Bitcoin fell to $16,920 during Monday morning trading in Asia.