Investors’ desire for risk tends to increase when the cost of capital is lower and liquidity is higher. This creates a favorable situation for high-growth assets, such as Bitcoin (BTC) and other cryptocurrencies. Typically, when there is more money in circulation, it boosts demand for these assets. However, despite inflation being under control in the United States, the cryptocurrency market has not reacted positively.
The United States Federal Reserve monitors various factors like the job market, inflation, and the value of the dollar to adjust its policies accordingly. When inflation is near the Fed’s target of 2%, it allows for interest rate cuts and injects liquidity into the market by providing capital to banks. This expansionary movement reduces the appeal of fixed-income investments.
Recent data from the Federal Reserve’s preferred inflation indicator shows a deceleration in inflation for May. Price increases during this period were the slowest since March 2021, marking the first time in this economic cycle that inflation surpassed the Fed’s target. The core Personal Consumption Expenditures (PCE) index, which excludes food and energy costs, rose by 2.6% year-over-year in May, in line with economists’ predictions.
San Francisco Fed President Mary Daly commented in an interview that the news of inflation gradually cooling shows that monetary policy is working. The U.S. Bureau of Economic Analysis also reported that personal income increased more than expected, while consumer spending was slightly below expectations.
Earlier in the year, market traders were anticipating at least three interest rate cuts, but the current projections have been adjusted to only two, expected to begin in September. According to Seema Shah, the chief global strategist at Principal Asset Management, a further deceleration in inflation and evidence of labor market softening will be necessary to pave the way for a rate cut in September.
Despite the recent record high of the S&P 500, driven by low inflation, a 4% unemployment rate, and personal income growth, the total cryptocurrency market capitalization has decreased from its peak in March. Even gold, which is considered a hedge asset, is currently trading slightly below its all-time high.
In theory, cryptocurrencies should benefit from the prospect of interest rate cuts and other expansionary measures due to their scarcity and non-censorable payment methods. However, the success of the Fed’s strategy strengthens the U.S. dollar, as seen in the U.S. Dollar Index (DXY). A higher DXY means that other currencies like the euro, pound, and Swiss franc are losing value.
Currently, the DXY is at its highest level since November 2023, and the U.S. five-year Treasury yield has decreased. These indicators suggest that investors have confidence in a “soft landing,” where inflation decreases without causing an economic recession. In this scenario, traders expect the stock market to continue reaching new highs without significant shocks in the real estate market.
This explains why lower inflation has not had a positive impact on the cryptocurrency market. However, there is still uncertainty about how the economy and the U.S. dollar will behave if the Fed implements an expansionary monetary policy. Therefore, a rally for Bitcoin and cryptocurrencies later in 2024 should not be ruled out.
Please note that this article does not provide investment advice or recommendations. Every investment and trading decision carries risks, and readers should conduct their own research before making any decisions.