Bitcoin: bottoming or heading lower?

King USD has been dominating markets lately. EURUSD hit parity, GBPUSD traded in the low 1.18s, and USDJPY revisited the zones near recent highs too. BTCUSD hasn’t escaped the dollar strength, and continues to trade in a tight range either side of $20,000:

The price action looks eerily similar to the range around $30,000. A series of higher lows with flat highs eventually giving way to lower prices. Will the same be true again?

Today’s US inflation number could be a key driver. Generally speaking, the more persistent inflation is, the more likely it is that the Fed (or any other central bank) would look to increase interest rates. The idea is to slow aggregate demand (consumer spending) in the economy, which, in turn, brings inflation down.

However, it takes time for these hikes to be fully passed through to the economy, and inflation is a lagging indicator, so there’s always the risk that a central bank can go too far, too fast.

In fact, this is precisely what Kansas City Fed President Esther George warned of in a speech on Monday:

"The pace at which this path unfolds will need to be carefully balanced against the state of the economy and financial markets,"

"This is already a historically swift pace of rate increases for households and businesses to adapt to, and more abrupt changes in interest rates could create strains, either in the economy or financial markets."

George was the lone dissenter at the June Fed meeting when the decision was taken to hike interest rates by 75bps, voting instead to hike by 50bps.

Back to inflation. The annual figure is running at 8.6%, and the consensus forecast is for the reading to increase to 8.8% in June.

Some commentators are increasingly hopeful of an inflation peak, which could see the Fed dial back the hawkishness and potentially pave the way for a more benign risk environment.

Others are more cautious, arguing that an inflationary peak doesn’t mean the end of inflation, and that inflation could remain high for years to come, meaning the low rates tailwind won’t return any time soon.

That covers the USD side of the pair, which for now at least, looks to be the primary driver.

Looking at Bitcoin itself, the entire crypto market has been under pressure as funds and lending protocols have gone to the wall. The founders of Three Arrows Capital are allegedly on the run from authorities in Singapore, while the Vermont state regulator believes that crypto lender Celsius is ‘deeply insolvent’ and has joined a multistate investigation.

"Due to its failure to register its interest accounts as securities, Celsius customers did not receive critical disclosures about its financial condition, investing activities, risk factors, and ability to repay its obligations to depositors and other creditors,"

With some of the ‘excess’ cleared out of the cryptosphere, and the potential for a ‘peak inflation’ print, the risks may start to look more two-sided rather than the one-way traffic of recent months.

Not investment advice. Past performance is not indicative of future results. Trading cryptocurrency may not be available depending on your country of residence.