New inflation forecast signals Fed rate cut as tailwind for Bitcoin price

It could be a situation of buying on rumors and selling on news, as the Bitcoin price and the Labor Department’s Consumer Price Index report are due out Wednesday morning.

Although the spot price of Bitcoin on crypto exchanges rose sharply on Tuesday and recovered by Wednesday morning, the situation changed later in the day and BTC fell to $58,000.

Economists had expected lower inflation figures from the US Bureau of Labor Statistics this week. A Dow Jones survey of economic analysts ahead of the report’s release showed that respondents expected an average increase of 0.2 percent in prices and the core inflation measure.

The CPI inflation report is cool

“The inflationary pressures we had built up have now eased significantly,” said Jim Baird, chief investment officer of Plante Moran Financial Advisors. According to Baird, inflation is now “no longer an issue (…) There is a general expectation that the worst is slightly behind us.”

Baird added:

“Given the focus on the relative weakening of the labor market and the fact that inflation is falling quite rapidly and I expect that to continue over the next few months, it would be a surprise if the Fed did not begin easing very quickly, probably as early as the September meeting.”

Falling consumer price inflation gives the US Federal Reserve plenty of scope to cut interest rates later this year. It could even start cutting rates as early as September.

Bitcoin price rises ahead of inflationary pressure

The Fed is concerned about the slowdown in the labor market and GDP. Its dual mandate from Congress is to keep unemployment as low as possible while stabilizing prices.

When the Fed cuts interest rates or signals that it will cut them again in the near future, the BTC price tends to rise. This is due to the economics of supply and demand and the nature of Bitcoin.

The original and class-leading cryptocurrency has a fixed supply of 21 million Bitcoin (BTC). The network will never issue more units of the cryptocurrency than this fixed supply limit. Moreover, it issues new quantities at a decreasing rate that is regularly halved every four years.

As a result, the economics of Bitcoin price are inversely correlated with US dollar interest rates. BTC rallied in the week and in the 24 hours leading up to the US inflation report, falling 3% after the Labor Department released the report and confirmed economists’ expectations.