Bitcoin started off the second week of January looking very strong, with the price holding strong above the Previous Month Value Area High around $17.2k. This is ahead of the first CPI event this year on Thursday.
As always, CPI day is set to be one of the most volatile days of the month for Crypto traders. These figures being released are the inflation readings of December 2022.
Why is CPI so important?
The CPI readings tell the US Federal Reserve the current situation in regards to inflation. This is a key metric used when the Fed set their monetary policy- deciding on the degree of interest rate rises. At the back of every trader and crypto investors mind is when will the Fed Pivot happen, and these reading will give some indication.
In a public appearance on Tuesday, Jerome Powell (Fed Chair,) remained tight-lipped and refused to give any indication on policy.
Other key members have insisted that all future policy will be data dependant, highlighting the significance of Thursdays event.
In recent months the CPI readings have been decreasing. This tells us that inflation has likely peaked and that the Feds interest rate rises are doing the trick of bringing inflation under control.
What are the Numbers to Watch?
The November (year on year) 2022 CPI reading declined to 7.1%. JP Morgan are forecasting the December 2022 reading to show 6.5%. This would represent a significant drop and likely lead to a further rally in the markets.
Looking ahead from this, all eyes will be on the FOMC meeting at the start of February. This is when the interest rate for the next month will be set out. At the last meeting the rate rise went from a 75 bps rise the month before, to 50 bps. Using the FedWatch tool from CMEGroup.com, we can see that 78% of people are pricing in a rise of only 25 bps next time around.
How Will Good News Affect Volatility?
The above chart shows the 5-minute Bitcoin chart on the day of the last CPI even in December 2022. Just in case it wasn’t obvious, I have highlighted the candle at the point the positive reading was released.
This price action shows exactly why many people will have lost money just before and just after the release. The price started to pump a while before the release, in the expectation of good news, and the release pump would have then caught out many early Shorters. On the other side of the release, many people longing would have been hurt too, as within minutes the price started to return to a mid-range.
Whatever the results tomorrow we can expect volatility. This gives us hope of some nice conditions to trade in, whichever the direction, in the days ahead.