Cryptocurrencies, Including Bitcoin, Show No Gains Amid Easing US Inflation

When the cost of capital is low and liquidity is high, investors are usually more willing to invest in high-growth assets. This environment should ideally boost assets like Bitcoin and other cryptocurrencies, as increased money flow typically heightens demand. Yet, despite a controlled inflation rate in the U.S., the expected positive response from the cryptocurrency markets remains absent.

Interest rate cuts impact corporate earnings and real estate markets

The Federal Reserve in the United States keeps a close watch on employment figures, inflation, and the dollar’s value to tailor its monetary policies. With inflation hovering around the Fed’s target of 2%, there’s an opportunity to lower interest rates and enhance liquidity by supplying banks with more capital, particularly when economic signs of strain are evident. This approach, aimed at stimulating the economy, tends to diminish the appeal of fixed-income investments.

Recent data from the Federal Reserve’s preferred inflation measure for May indicated a slowdown in inflation, marking the slowest rise in prices since March 2021. This was the first time since surpassing the Fed’s 2% target earlier in the economic cycle. The core Personal Consumption Expenditures (PCE) index, which excludes volatile food and energy prices, increased by 2.6% year-over-year in May, consistent with economist forecasts.

In a CNBC interview, San Francisco Fed President Mary Daly observed that the data is “just additional news that monetary policy is working, inflation is gradually cooling.” The U.S. Bureau of Economic Analysis also reported a 0.5% rise in personal income for the month, which was above the expected 0.4%. However, consumer spending growth was slightly underwhelming at 0.2%, missing expectations of a 0.3% increase.

At the start of the year, traders had predicted at least three rate cuts. Now, expectations have been scaled back to just two rate cuts starting in September. Seema Shah, Chief Global Strategist at Principal Asset Management, mentioned to CNBC that “a further deceleration in inflation, ideally coupled with additional evidence of labor market softening, will be necessary to pave the way for a first rate cut in September.”

Despite these favorable economic indicators and a 4% unemployment rate boosting the S&P 500 to record highs on June 28, the total market capitalization for cryptocurrencies remains depressed, well below its peak in March 2024. Even gold, usually a reliable asset during uncertain times, is trading just 5% below its record high from May.

Cryptocurrencies tend to underperform when the U.S. dollar displays strength

Cryptocurrencies, theoretically, are well-positioned to gain from interest rate cuts and expansive monetary policies due to their finite supply and decentralized nature. Nevertheless, when the Federal Reserve’s policies effectively strengthen the U.S. dollar—as evidenced by the rise in the U.S. Dollar Index (DXY)—cryptocurrencies do not perform as well. The DXY recently reached 106, its highest point since November 2023, and the yield on U.S. five-year Treasury notes has dropped from 4.72% to 4.30% since April 25, indicating investor confidence in a balanced economic slow-down without triggering a recession.

This scenario accounts for why a dip in inflation hasn’t spurred significant gains in the cryptocurrency market. However, the future economic landscape and the behavior of the U.S. dollar, especially if the Fed adopts more expansionary policies, could yet influence a rally in Bitcoin and other cryptocurrencies later in 2024.

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