Hotter-than-expected CPI and strong retail sales pushed investors out of crypto funds and revived talk of a Fed rate hike.
Digital asset investment products have shed $434 million so far this week as September inflation exceeded forecasts and resilient retail sales strengthened the case for the Federal Reserve to keep rates higher for longer, according to a new report from CoinShares.
US CPI rose 3.7% year-on-year in September, while monthly inflation reached 0.6%, data released this week by the Bureau of Labor Statistics showed. Both figures came amid a 9.1% monthly rise in gasoline prices, which accounted for about half of the increase in headline CPI and pushed the annual rate above the 3.6% consensus forecast.
Core CPI rose 0.3% month-on-month and 2.6% year-on-year, showing that underlying price pressures have yet to ease fully.
Stronger consumer spending is adding to the challenges facing the Fed as it seeks to rein in inflation. US retail sales increased 0.8% in September, exceeding forecasts of around 0.3%, while August’s gain was revised up to 1.3%. Gasoline station sales rose 6.4% as fuel prices increased.
Resilient demand alongside persistent price pressures could limit the Fed’s scope to loosen financial conditions, CoinShares stated.
Bitcoin and other digital assets have come under pressure as markets reassess the path of US interest rates. Higher rates can lift real yields and make assets that generate no regular income less appealing. Tighter monetary conditions can also reduce liquidity flowing into riskier investments.
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Markets are not yet pricing in a rate increase as the most likely outcome for October, however.
Markets are pricing in an 82.8% probability that the central bank will maintain the benchmark interest rate at 375–400 bps, with odds of a 25-basis-point hike to 400–425 bps falling to 17.2%, according to the CME FedWatch Tool.
Even so, futures markets have shifted toward a more hawkish outlook, with traders increasingly anticipating another increase before the end of the year. The key question is now when further tightening would come, rather than whether inflation has cooled enough to allow policy to ease.
Bitcoin could remain volatile in the short term as markets assess the risk of further Fed tightening, though the current macroeconomic picture is not enough to establish a lasting downtrend, according to CoinShares.
A more supportive environment would require evidence of cooling inflation or weakening economic activity that reduces the need for further monetary tightening, the firm noted. Without that shift, stronger economic data could keep rate expectations elevated and trigger further swings across digital assets.
Bitcoin may remain range-bound in the near term, with investors focusing on strategic allocation goals rather than reacting to individual economic releases, CoinShares stated.
Bitcoin rallied ahead of the US stock market open, trading near $83,000 and gaining over 2% in the past 24 hours.