With the residual supply pressure from Germany’s Saxony state nearly resolved, the upcoming U.S. consumer price index (CPI) report set for release on Thursday will be crucial in charting Bitcoin’s (BTC) near-term course. The CPI data, scheduled for 12:30 UTC (8:30 ET), is anticipated to reflect a 0.1% month-over-month increase for June following a stagnant May, leading to a year-over-year rise of 3.1%, according to a Dow Jones survey. The core CPI, excluding the more volatile food and energy prices, is forecast to have climbed 0.2% from May and 3.4% from June last year.

Federal Reserve Implications

Should the actual figures align with these estimates, it would underscore continued advancement towards the Federal Reserve’s (Fed) 2% inflation target, potentially paving the way for the bank to commence the highly anticipated rate cut cycle this year. Prospects of rate reductions generally bode well for risk assets like Bitcoin, aiding the leading cryptocurrency in extending its price recovery from the early July lows around $53,500. However, according to leading crypto media firm data, this recovery has faced resistance, with buyers struggling to secure a position above the $59,000 mark.

Market Sentiment

“CPI data will be closely monitored, with markets expected to react significantly to this release. Analysts’ optimistic outlook for late 2024 and 2025 hinges on the Federal Open Market Committee (FOMC) reducing policy rates, as lower rates typically enhance liquidity, driving investors towards ‘longer-tail’ assets such as cryptocurrencies,” stated algorithmic trading firm Wintermute in an email to CoinDesk.

Historical Context and Projections

The inflation rate has markedly decreased from the peak of 9.1% in 2022. Nonetheless, the Fed has reiterated the necessity for continued progress on the inflation front before easing the elevated interest rates. Fed Chair Jerome Powell, in his recent testimony to Congress, emphasized the bank’s stance of not waiting for inflation to fully cool to 2% before implementing rate cuts.

FedWatch Tool Insights

According to the CME’s FedWatch tool, following Friday’s weak payrolls report, traders have priced in approximately a 70% chance of a Fed rate cut in September, with increasing likelihood of another cut in December.

Bond Market Dynamics

The U.S. Treasury yield curve’s reaction to the anticipated moderate CPI release might sway broader market sentiment, including Bitcoin. Slower inflation and heightened rate cut expectations can elevate prices for the two-year note, driving its yield lower. This occurs as investors, foreseeing lower interest rates, are inclined to pay a premium for securities offering higher yields presently. Conversely, the 10-year note’s yield may remain elevated due to concerns over larger budget deficits under a potential Trump presidency, as his chances of winning the November elections have recently improved.

Yield Curve Implications

The net effect would be a so-called bull steepening of the yield curve, marked by the spread between yields on the 10- and two-year notes. The curve has been inverted since mid-2022, with two-year notes consistently offering relatively higher yields.

Historical Performance During Bull Steepening

According to the CAIA Association, periods of bull steepening, which characterize a rapid normalization of an inverted yield curve, have historically coincided with economic contractions and risk aversion. “Typical bull-steepening periods were: 1990-1992, 2001, 2003, 2008, and 2020, all of which were recessionary,” CAIA noted. “Equities generally underperform during these regimes, with their performance lagging the overall historical average,” CAIA added.

Expert Observations

Noelle Acheson, author of the “Crypto Is Macro Now” newsletter, echoed similar sentiments in her July 4 edition, noting that a sharp steepening has always preceded the onset of a recession. Acheson further commented that the curve has recently steepened due to ongoing political uncertainty in the U.S., suggesting that a potential Trump victory could drive an inflation uptick through tariffs and extensive issuance to fund proposed tax cuts.