New US inflation figures will be published next week. And the financial world will be watching this February 14th with great interest. Because investors and analysts are very curious to see whether the inflation rate in the most important economic market for trading stocks and cryptocurrencies will continue to decrease.
Recently there has been a significant easing of inflation in the United States. From a level of 9.1 percent in July 2022, which was the highest level in 40 years, inflation was brought back to 6.5 percent in December 2022. The relatively strong decline in a short period of time triggered a wave of euphoria on the markets financial at the beginning of the year. Not only stock buyers, but buyers of Bitcoin, Ethereum and most other cryptocurrencies made strong profits in January.
Strong interest rate hikes have an effect
The US Federal Reserve is committed to success. The currency watchers slowed inflation by sharply raising interest rates. After the zero interest rate policy during the corona pandemic, the main interest rate in the USA rose to the 5 percent mark with the final increase of 0.25 basis points. Many analysts initially took the combination of falling inflation and sharply higher interest rates as a good sign for the markets. After interest rates have risen so much while inflation has fallen at the same time, the Fed may stop raising interest rates early or even reverse interest rates to keep the economy from recession.
However, Fed Chairman Jerome Powell’s latest comments this week have analysts questioning whether these expectations will actually be met. Due to an event in Washington, Powell explained that although another significant reduction in the inflation rate is expected this year, it will probably take until 2024 before the target is reached. Because the central bank wants to bring inflation down to a maximum of 2 percent. However, the current 6.5 percent is still a long way off, even if the trend has been right recently.
Strong labor market as a burden
In addition, the labor market in the US, which according to Powell is in “extremely strong shape” could act as a brake on inflation falling further. More than half a million new jobs were added in January, far more than experts expected. The unemployment rate fell to 3.4 percent – the lowest level since 1969. Low unemployment figures are welcome for the economy. And it sounds contradictory at first that they could be “poison” for the financial markets.
But the correlation between inflation and the unemployment rate is described by the Phillips curve. When unemployment is low, it is more difficult for companies to find readily available qualified workers. Accordingly, increasing collective agreements or unions improves the bargaining position of employees to push for higher wages. This results in higher costs for companies. To alleviate this, they have to sell products and services at higher prices – and inflation rises.
🎩 Jerome Powell’s speech was very calm this morning. 😂
— 🏦 Trade 🚫 EXPOSED (@WhiteOakFX) February 7, 2023
The inflation target could not be reached until 2024
In light of these announcements, investor sentiment has now cooled somewhat after Powell’s speech. Powell said there is “more work to do” and that it would not be appropriate to cut rates this year if the economy is performing as expected. The head of the Minneapolis Federal Reserve District has already said that interest rate hikes to a level well above 5 percent are needed. The central bank Raphael Bostic also told the Bloomberg agency that another sharp increase in the interest rate may be appropriate and he implemented another interest rate increase of 0.5 basis points.
This has caused analysts to worry that inflation will not fall as quickly as expected, and that the central bank will have to raise interest rates for much longer to be able to reach the 2 percent target out. That would mean the rest of 2023 may not be as strong as suggested at the start of the year. The prices of Bitcoin, other cryptocurrencies and the stocks in the US markets are already falling slightly.
Forecast for January at 6.2 percent: is there a market correction?
January’s US inflation figures, to be announced next week, could point the way for further uptrend. A further decline is predicted in the forecast. According to analysts, the inflation rate should fall to 6.2 percent, which corresponds to a decrease of 0.3 percent compared to December. But here there could be a rude awakening for the stock exchanges and the crypto market. Because if inflation does not meet forecast expectations and does not fall as sharply, rise or even rise, there could be a quick and violent sell-off in the markets.
There is a warning signal from Germany at the moment. Because inflation rose again slightly in January 2023 to 8.7 percent. In December it was still 8.6 percent. Of course, the markets cannot be compared 1:1 to each other, but the example shows that it is not so easy to push down inflation quickly and sustainably. And that’s despite the European Central Bank recently raising interest rates by 0.5 basis points after starting later than the US. ECB President Christine Lagarde also said further increases in interest rates of 0.5 percent each may be necessary.
Is BTC Testing Coins Again?
Therefore the price of Bitcoin could go down again in the short term if the inflation figures do not meet expectations next week. However, it remains to be seen if this will be just a short correction or if there will be a sustained downward trend again and perhaps a retest of the November 2022 lows.
Currently, investors who bought the dip in November below $16,000 are still in the comfort zone. Because BTC/USD rose almost 50 percent within a short period of time. In any case, the further course of 2023 will remain exciting and a continuation of the rally from January is by no means a foregone conclusion.
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