Bitcoin eyes US inflation report, potential DOLLAR liquidity squeeze

Spark Global Limited reports:

Bitcoin’s recent bull market trajectory has waned after last week’s double-digit price drop. The cryptocurrency’s near-term prospects hinge on Tuesday’s U.S. inflation report. The leading cryptocurrency’s market cap fell 3% today to $44,500, after falling 11% last week. It was the biggest weekly percentage drop since May. Bitcoin’s near-term bullish outlook has waned due to last week’s decline, and the cryptocurrency could now consolidate between $44,000 and $48,000, according to Coinbase Institutional. Some chartists worry that the price structure is similar to that seen after bitcoin’s double-digit drop in the second half of April, and therefore will fall further.
If the US Consumer price index for August, due at 18:00 UTC on Tuesday, comes in at an annualised rate of more than 5 per cent, there could be a big sell-off. That could accelerate the Fed’s plans to start scaling back its liquidity-stimulating asset purchases.

Bitcoin fell from $58,000 to $30,000 in mid-May after official data released on May 12 showed U.S. CPI at a three-year high, sparking fears of tapering. The sell-off comes as China clamps down on cryptocurrencies and worries about the negative environmental impact of cryptocurrency mining.

“Inflation remains the key factor, especially when the base effect ends and THE CPI data starts to reflect the Fed’s true year-on-year picture,” QCP Capital said on its Telegram channel. “Arguably, the worst of the base effects are now over (as the chart below shows). If inflation remains above 5 per cent, hawks will certainly start expressing concern.”

Several Fed members have turned hawkish, signaling a willingness to begin tapering this year. Some observers fear that tapering could lead to a sharp drop in dollar liquidity in the fourth quarter, and could coincide with the Treasury issuing more debt to rebuild the Treasury General Account (TGA) after raising the debt ceiling.

According to the Wall Street Journal, the U.S. government could run out of cash and hit the debt ceiling between mid-October and mid-November. The Fed is expected to start tapering at the same time.

“The Treasury is likely to rebuild its cash balance quickly after the suspension of the debt ceiling, as the TGA’s new ‘equilibrium level’ appears to be around $800bn. This is a net liquidity withdrawal of nearly $600bn compared to the current situation and cannot be seen as good news for risk appetite, “analysts at Nordea Bank said in a weekly research note published on Friday.
Bitcoin and other traditional market risk assets have surged in the past 18 months amid a flood of liquidity from the Fed’s stimulus program. As a result, Messari’s Mira Christanto argues that the liquidity squeeze caused by Fed tapering and US Treasury actions could weigh on asset prices in general, and bitcoin in particular, as capital in the crypto market is opportunistic and tends to overreact.

Big investment banks expect risk aversion to increase in the coming weeks. Morgan Stanley expects U.S. stocks to fall as much as 15% by the end of the year, while Bank of America is forecasting a 6% decline, according to the Australian Finance Review.

The stock market drop could add to bearish pressure on bitcoin. Charles Edwards, founder of Capriole Investments, wrote on Twitter: “The world still sees Bitcoin as a risky asset.” “Almost every pullback in Bitcoin in 2021 has been associated with a pullback in the S&P 500 of minus 2% or more.” Last week, the S&P 500 fell 1.69 percent and Bitcoin fell 11 percent.