The crypto market continues to trend upwards. After the huge rally at the beginning of the year, the leading currency Bitcoin was quoted in the area of the annual high of 25,000 dollars at the time of publication. The buying mood among investors has increased significantly. This is also reflected by the Crypto Fear and Greed Index, a mood barometer for the market. Accordingly, the value today is 58 and therefore in the realm of “greed”.
Investors lack confidence in the rally
But not everyone is confident in this strong market recovery. Current data shows that the rally on the stock exchange and the crypto market is mainly driven by small private investors. However, many large institutional investors are holding back, skeptical that the bull run could end soon and be followed by a rude awakening.
The good mood on the market is mainly due to the fact that it is assumed that the tight interest rate policy will soon ease and that interest rate cuts could be seen again this year. Over the past few months, this optimism has been driven by the significant drop in inflation in the US. From a 40-year high of 9.1 percent in June 2022, it has recently fallen to 6.4 percent. This reduction is quite significant.
However, inflation fell much less in January 2023 than before and the tangible decrease of 0.1 percent was 0.2 percent weaker than expected. Despite this disappointment, investors seem to be riding the wave of euphoria. Bitcoin & Co prices have even risen significantly over the past week, which is contradictory because the inflation figures don’t really justify this.
Inflation far from under control
But will there be a sharp correction soon that will dissuade investors from their dreams that the worst is over? There are at least warning signs for this situation. A closer look at the inflation data shows that the decline in recent months is mainly due to the end of the sharp rise in energy and food prices. However, these have completely exploded before and lost touch with previous prices, so this small relaxation does not seem unexpected.
However, prices in the service sector continue to rise. Company purchase prices are also continuing to rise sharply. Companies are likely to pass these higher costs on to consumers in the form of more expensive products and services in the coming months. The bottom line is that the cost of living will continue to rise.
BREAKING: US inflation accelerated in January according to analysts’ estimates, with the overall consumer price index climbing 0.5% https://t.co/WK7tcE6ut2 pic.twitter.com/eJNScHiYBn
— Bloomberg TV (@BloombergTV) February 14, 2023
More price increases are likely
At the same time, US economic data is very strong and the unemployment rate is at a very low level. Although this seems positive, it could have negative consequences for interest rate developments. Because when unemployment is low, it is harder 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 mitigate them, they also have to make products and services more expensive – and inflation is also rising.
So the overall situation does not look like the US Federal Reserve could now sit back and end interest rate hikes or even reduce them. We are still miles away from the 2 percent target and given the current trend, it does not seem impossible that inflation will not fall at all in February or that it will rise again. And remember: inflation only describes the rate of increase. Even as inflation falls, prices continue to rise, just at a slower pace.
Central bankers: 0.5 percent rate hike appropriate
Looking at the situation, more and more central bankers and financial experts are now warning that the fight against inflation is far from being won. For example, the head of the regional central bank in Cleveland emphasizes that a 0.5 percent increase is “quite appropriate” at the next FED meeting in March. This would mean that the Fed would raise interest rates more than recently. Because at the last meeting of the central bankers at the beginning of the month, interest rates were only adjusted by 0.25 basis points, after sharp increases of 0.5 and even several times 0.75 basis points in 2022.
The IS #FED wants to raise interest rates to 6%. Faster and tougher according to the Handelsblatt.
Is the economy strong enough or is this the way we will go into recession?
What do you think?
— SwissCryptoJay (@SwissCryptoJay1) February 20, 2023
However, a 0.5 percent adjustment would likely exceed the 5 percent key interest rate in the US this year, which many analysts have recently rated as the central bank’s target range. Torsten Slok, for example, believes that this can happen. As Handelsblatt reports, the expert believes that the main interest rate can easily reach 6 percent in 2023.
However, the financial markets have not priced this situation in at the moment and many investors may be in for a rude awakening at the Fed’s next meeting on March 21, if it happens.
The US is at risk of insolvency
In addition, there are still other uncertainties that could stop the rally faster than many think. In the USA, for example, there is a dispute about the country’s debt policy. The debt limit must be raised quickly, otherwise the government could run out of money by the summer. In the worst case, there is a risk of default, which could worsen the creditworthiness of the United States. But the government around US President Biden and the new Republican majority in the House of Representatives have so far shown no sign of agreement. If the debt falls, there could be a sharp correction in the markets.
Observers remain concerned about the escalating conflict between the US and China. There are fears that China could soon support Russia in the war of aggression against Ukraine with arms deliveries. However, according to the US government, this would have crossed a red line. This could lead to strong sanctions that would bring the markets to a standstill. It is also unclear how Russia will continue the war that began almost a year ago. Some observers expect that Russia will greatly accelerate its attacks again on this anniversary next Friday.
Overall, the current hype in the financial markets seems to have a very thin foundation and could collapse at any time.
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