The cryptocurrency market got off to a flying start this year, with coins across the board bringing it back to 2020 jumping sharply upwards.
The measures came from the back of the optimism that inflation cools down. We have seen European inflation enter below expectations last week, landing at 9.2% against expectations of 9.5%, and down from 10.1% the previous month.
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Renewed hope comes from the back of a increase of 50 basis points interest rates last month in the UK, Europe and the US, after previous hikes of 75 basis points. The slower rise reflects the fact that while inflation remains elevated, the numbers suggest it may have peaked – and with two months of positive readings things at least look brighter than the year. last.
That was all crypto needed to hear as prices surged. With the new year only nine days away, crypto investors are enjoying some breathing space after the Armageddon was in 2022.
What will happen to crypto this week?
But the most important is Thursday, with the full set of US CPI data to be announced. As has become the monthly ritual over the past year, eyes will be glued to screens to get that all-important number. A weaker than expected reading would likely cause the market to jump again.
On the other hand, a disappointing reading could mean even worse price action than it normally does, such is the momentum gained after two straight months of placid inflation data. Markets also rose last week on the back of the nonfarm payrolls report, with investors reading the data as potentially leading to an earlier-than-expected Fed pivot.
Nevertheless, inflation remains very high and the labor market is still showing resilience. We probably need to see a bit more weakness in the latter and a tangible drop in demand before the Fed eases its pledge to do everything in its power to sink into oblivion and nuclear inflation. .
Expect volatility in the week ahead
Either way, there could be volatility in the market over the coming week. Since FTX Collapse In early November, crypto markets were actually relatively calm. I plotted the volatility before Bankman-Fried showed the world its true colors, and it clearly shows the rally in volatility and subsequent decline in mid-December.
Crypto is therefore back to what it has been doing for most of the last year, with a few isolated episodes aside – and that follows the stock market.
After Thursday’s CPI reading, the next key date is then February 1st. This is when the next FOMC meeting will take place, or in other words, when the Fed announces its latest plans for interest rate hikes.
Ears will be hanging on every word from the most important person in the markets right now, Federal Reserve Chairman Jerome Powell, as he offers his thoughts and advice on what happens next.
Last year the Fed hiked seven times as it became abundantly clear that inflation was a problem that could no longer be ignored.
In conclusion, it’s clearly a big week, with the economy at a crossroads. Can optimism continue to abound when inflation has peaked? Or will the market be pulled down with a higher than expected punch?
The core inflation figure could arguably be even more important than the headline figure. Core inflation excludes the more volatile food and energy prices, the idea being that these are less affected by monetary policy. Typically, this is the figure that policy makers often focus on.
With gasoline prices having come down significantly from last year, the CPI figure will be boosted by the fact that these higher numbers will disappear from the index with an additional month’s data. Therefore, the basic figure could take on even greater importance.
Whatever the number, however, crypto markets will be staring at it when deciding whether or not to continue this 2023 rally.