How Could US Consumer Price Index (CPI) Data Impact Crypto Markets?

Key Points

• US Consumer Price Index (CPI) inflation data for June is scheduled for release at 1230GMT on Wednesday.
• Another upside surprise, like happened last month, could send crypto into a tailspin as markets up Fed tightening bets.
• Some are hopeful that consumer spending/sentiment data out on Friday could indicate US economic cooling, reducing Fed tightening fears.

Markets Brace for US CPI Data Release

US Consumer Price Index (CPI) inflation data for June is scheduled for release at 1230GMT on Wednesday and, if last month’s CPI data release is anything to go by, could cause ructions in cryptocurrency markets. Traders will recall that the release of a hotter-than-expected May CPI report in mid-June at the time triggered a collapse in stock, bond, and cryptocurrency prices.

That’s because the data forced the US Federal Reserve to accelerate the pace of interest rate increases at its June policy meeting to 75 bps from 50 bps at the meeting prior. The Fed minutes from its June meeting last week confirmed that the central bank accelerated the pace of rate hikes due to a “deterioration” in the near-term inflation outlook and that the central bank is prepared to implement another 50 or 75 bps rate hike at the upcoming July meeting.

Long-term US bond prices have now largely risen back to/above their levels in June prior to the sell-off inducing CPI data release as bond investors price in a weaker US economic outlook. But stocks and crypto have nowhere near recovered back to pre-June’s CPI data release levels.

Indeed, despite growing concerns that the US economy may be headed for recession and money markets that are pricing in a series Fed rate cuts starting in the second half of 2023, markets remained focused on the near-term outlook for Fed policy. Wednesday’s CPI data release is expected by analysts to show the headline YoY rise in prices reach 8.8%, a new multi-decade high.

Meanwhile, the headline price index is seen rising over 1.0% MoM for a second successive month to reflect surging gas prices. If the upcoming CPI data release does show a further acceleration of US price pressures, even if not quite as acute as feared, that should keep the Fed on course to raise interest rates by a further 75 bps later this month.

While the Fed has indicated that it is concerned about a slowdown in US growth, last week’s June jobs and ISM Services PMI survey data (both strong) will have eased fears about an imminent recession.

Downside Risks to Crypto

All said, Wednesday’s CPI data appears to present downside risks to cryptocurrency prices. An upside inflation surprise would result in an upping of Fed tightening bets that would, like back in June, likely weigh heavily on risk assets like stocks and crypto.

A CPI report that largely prints in line with expected would show a further rise in price pressures and solidify expectations for near-term Fed tightening. Whilst recent downside in crypto prices since last Friday probably reflects that this is already being priced in to some degree, further downside shouldn’t be ruled out.

A big downside surprise would probably be needed to boost crypto. PCE inflation data, an alternative US inflation measure preferred by the Fed, released in June a few weeks after the CPI data saw its core measure fall to a six-month low. This contributed to hopes that US price pressures might have already peaked.

Traders will thus be watching the core metrics in Wednesday’s CPI report for further evidence of so-called peak inflation. The YoY rate of core price increases is seen falling to its lowest since January of 5.7%. If it comes in even lower, the markets may start winding down Fed tightening bets for later this year and 2023.

Retail Respite

While Wednesday’s CPI data is probably going to reaffirm expectations for rapid near-term tightening from the Fed, some are hopeful that June US Retail Sales data scheduled for release on Friday may contain evidence of a cooling of consumer demand.

Headline Retail Sales are seen rising 0.8% MoM in June, according to a Reuters poll of economists. If MoM headline inflation comes in at 1.1% as expected, that implies a 0.3% decline in inflation-adjusted spending. That would mark a second successive monthly fall in real spending after inflation-adjusted retail sales fell 1.3% MoM in May.

Clearly, the US consumer is feeling the bite of inflation. That much will be evident in the preliminary release of the July University of Michigan Consumer Sentiment survey, also on Friday, which is expected to show sentiment falling to a fresh all-time low.

Many think that the current suffering of US consumers is a leading indicator that the economy might be headed into a near-term recession. If this week’s data results in a substantial build-up of recession bets, the market may begin winding down Fed tightening bets for late 2022/2023. That could offer cryptocurrencies some respite, even if sentiment gets hit on Wednesday by hot CPI figures.

Another risk event to note this week is the unofficial start of the US earnings season, with a number of big US retail banks reporting figures for Q2 in the second half of the week. Investors have been fretting about how weakening growth may impact earnings and will thus be watching developments closely. Any downside in stocks on poor earnings could translate into weakness in crypto.

Bitcoin at Risk of Breaking Key Support

Bitcoin is currently trading just under $20,000 and testing a key support trendline linking the mid-June, late-June and early-July lows. Should this week’s macro developments cause a deterioration in crypto sentiment and Bitcoin break below this uptrend, it is at risk of swiftly testing late-June lows in the mid-$18,000s and potentially even retesting annual lows in the mid-$17,000s.