Crypto Market Volatility Spikes as Core Inflation Exceeds Expectations

The cryptocurrency market experienced heightened volatility on Wednesday following the release of the August Consumer Price Index (CPI) data in the United States. While the headline CPI matched forecasts, the core inflation rate surpassed economists’ expectations, potentially influencing the Federal Reserve’s upcoming decision on interest rates.

TL;DR

• U.S. headline CPI for August met expectations at 0.2% month-over-month and 2.5% year-over-year
• Core CPI rose 0.3%, exceeding the anticipated 0.2% increase
• Bitcoin price dipped following the news, trading at $56,500, down 1.5% over 24 hours
• Expectations for a 25 basis point rate cut by the Fed next week have solidified

CPI Data and Market Reaction

The U.S. Bureau of Labor Statistics reported that the Consumer Price Index rose 0.2% in August, aligning with economist forecasts. On a year-over-year basis, CPI increased by 2.5%, slightly lower than the expected 2.6%. However, the core CPI, which excludes volatile food and energy prices, climbed 0.3% month-over-month, surpassing the projected 0.2% rise.

In response to the data, Bitcoin, the leading cryptocurrency, extended its early losses, dropping 1.5% over the past 24 hours to $56,500. Traditional financial markets also reacted, with U.S. stock index futures declining and the 10-year Treasury yield gaining 3 basis points to 3.68%.

Implications for Federal Reserve Policy

The unexpected uptick in core inflation has likely cemented expectations for a more conservative approach by the Federal Reserve at its upcoming meeting. Prior to the CPI release, investors had priced in a 71% probability of a 25 basis point rate cut, with a 29% chance of a larger 50 basis point reduction.

Following the report, the odds of a 25 basis point cut jumped to 85%, according to CME FedWatch data. This shift suggests that the market now anticipates a more measured response from the Fed in light of persistent inflationary pressures.

Broader Crypto Market Trends

In related news, crypto exchanges reported significant Bitcoin outflows, totaling approximately $750 million on September 10th. This marks the largest net outflow since May, potentially indicating a shift in investor sentiment as Bitcoin prices hover around the $57,000 mark.

Juan Pellicer, a senior researcher at IntoTheBlock, suggested that such outflows often signal anticipation of price increases, as investors move their assets to private wallets. Additionally, regulatory concerns and institutional accumulation may contribute to large-scale transfers from exchanges.