Is Risk-on Trading Back? Crypto Notches Rare Rally

After a brief morning dip, bitcoin and ether bounced back by Thursday afternoon in New York as slowing inflation started to push traders back into risk assets.

Inflation rose 6.5% year-over-year in the 12 months ending in December, according to data from the Bureau of Labor Statistics released Thursday morning. Core inflation — which excludes volatile food and energy prices — rose 5.7% in December from the previous year, a decline from November’s 6% year-over-year showing. 

Bitcoin on the day held its price mooring well above the $18,000 level, approaching as much as $19,000 by the afternoon. Bitcoin and ether at points rallied 5.3% and 4%, respectively, in the hours after the CPI report’s release, the last before the Federal Reserve’s next meeting. 

“The recession is the focus for everyone, including the Fed, indicating slower demand,” said Rena Shah, head of operations and strategies at Trust Machines. “A slower-paced economy is needed to tame inflation, but it’ll come at a cost of short-term volatility. If inflation is moving downwards…we’d expect long-value positions with bitcoin retaining as that store of value asset.”

In terms of sustaining the rally, which for crypto tokens and equities has lasted all of 2023, so far, investors are expected to keep a close eye on the Fed’s next interest rate decision, slated for next month. 

Thursday’s report, largely in line with expectations on The Street, does not change much in terms of the overall inflation outlook, analysts from financial data provider Kalshi wrote in a note Thursday. Annual inflation at 3%, above the Fed’s 2% target, is still expected for 2023, they said. 

“The bigger change is in expectations of Federal Reserve behavior,” Kalshi’s note said. “By eliminating the upside risk from the January print, the probability of a 50 bp hike in the Fed’s next meeting has fallen from 25% to 9%.” 

By publication, CME Group was showing an even slimmer likelihood of a 50 basis point hike with only around 4% of the market calling for it, data shows. 

But even as the market confidently prices in a more confident gauge for where interest rates will fall, other analysts are skeptical to put too much emphasis on one reading. 

“Everyone, including the Fed, is just guessing,” Greg Foss, executive director of strategic initiatives at Validus Power Corp, said. “Monetary policy usually has a 12-month lag.”

---

Start your day with top crypto insights from David Canellis and Katherine Ross. Subscribe to the Empire newsletter.

Explore the growing intersection between crypto, macroeconomics, policy and finance with Ben Strack, Casey Wagner and Felix Jauvin. Subscribe to the Forward Guidance newsletter.

Get alpha directly in your inbox with the 0xResearch newsletter — market highlights, charts, degen trade ideas, governance updates, and more.

The Lightspeed newsletter is all things Solana, in your inbox, every day. Subscribe to daily Solana news from Jack Kubinec and Jeff Albus.