Bitcoin (BTC) experienced a sharp decline of over 3% on Wednesday, falling back below $56,000 after a promising rally earlier in the week. The drop comes in response to the latest US Consumer Price Index (CPI) data, which diminished the likelihood of a 50bps rate cut from the Federal Reserve.
Inflation Data Dampens Rate Cut Optimism
The US CPI report for August revealed a 0.2% month-on-month (MoM) and 2.5% year-on-year (YoY) rise, both aligning with expectations. However, the Core CPI, which excludes volatile food and energy prices, rose by 0.3% MoM, slightly exceeding the 0.2% forecast. This suggests that US inflation is steadily moving back towards the Fed’s 2.0% target, keeping the possibility of a rate cut open but reducing the chances of a larger 50bps cut.
As a result, the market’s implied probability of a 50bps rate cut later this month fell from 34% to 15%, according to CME interest rate futures. This shift has negatively impacted Bitcoin, as well as traditional risk assets like US stocks. The S&P 500 saw a 1.4% drop, extending monthly losses to over 4%.
Other Factors Adding Pressure
Additional factors have contributed to the drop in risk appetite, weighing on Bitcoin’s price. One significant development is the outcome of the recent US presidential debate. Vice President Kamala Harris, the Democratic nominee, was widely seen as outperforming her Republican opponent, Donald Trump. Trump, viewed as more pro-Bitcoin, saw his chances of winning drop from 53% to an even 49% following the debate, as measured by Polymarket.
At the same time, hawkish comments from Bank of Japan officials during Wednesday’s Asia-Pacific trading session sent the yen to new highs against the US dollar. Yen strength has troubled risk assets since July, as the prospect of rate hikes in Japan has put pressure on the yen carry trade, where investors borrow in low-interest yen to fund riskier assets.
Where Could Bitcoin Go Next?
The outlook for Bitcoin remains tilted to the downside. While Harris’s presidency may not pose a significant threat to the broader crypto sector, her campaign’s openness to reversing the Biden administration’s anti-crypto stance is less favorable compared to Trump’s openly pro-Bitcoin policies. Thus, any developments shifting election odds in her favor may weigh on Bitcoin sentiment.
On the macroeconomic front, concerns about a potential US recession are mounting, with fears that the Federal Reserve might be lagging in efforts to prevent one. If upcoming US economic data points to continued weakness, Bitcoin could face further downward pressure.
Moreover, the yen’s strength is expected to persist as the Bank of Japan moves closer to additional rate hikes, adding another layer of headwinds for Bitcoin.
Technical Analysis: Bearish Signals
From a technical perspective, Bitcoin’s repeated failure to break above its 50-day and 200-day moving averages (DMAs) in August suggests bearish control. The likelihood of retesting August lows under $50,000 remains high. In a worst-case scenario, involving a US recession, a Harris election victory, and continued yen appreciation, Bitcoin could plunge as low as $40,000.
