A soft U.S. inflation report due later on Wednesday is expected to be favorable for risk assets, including bitcoin (BTC). However, expectations for a major rally may be too optimistic.
The U.S. Labor Department is set to release January’s consumer price index (CPI) report at 13:30 UTC. It’s anticipated that the cost of living rose by 0.3% month-over-month in January, a slight slowdown from December’s 0.4% increase, based on Reuters estimates tracked by FXStreet. The annual CPI is forecasted to stay at 2.9%, the same as December.
The core inflation figure, which excludes the volatile food and energy sectors, is expected to have risen to 0.3% from 0.2% month-over-month, leading to an annualized rate of 3.1%, slightly down from December’s 3.2%.
If the report comes in lower than expected, particularly the core inflation, it could raise hopes for additional interest rate cuts by the Federal Reserve (Fed). This would likely put downward pressure on Treasury yields and the dollar, making riskier assets like bitcoin more attractive. According to CME’s FedWatch tool, the market currently places a 54% probability on the Fed either cutting rates once or holding them steady this year.
Although a potential rate cut could provide some support to BTC, it’s unlikely to trigger a breakout from its current consolidation range of $90,000 to $110,000.
Market data points to an uptick in inflation in the coming months, particularly due to concerns around trade wars, which may limit the Fed’s ability to aggressively cut rates. Metrics from Mott Capital Management show that two-year inflation swaps have climbed to nearly 2.8%, the highest level since early 2023. A similar trend is seen with five-year swaps, suggesting the market anticipates higher inflation in the future, potentially due to ongoing tariffs.
This increase in inflation expectations signals that inflation’s progress toward the Fed’s 2% target may have stalled, and price pressures could rise again in the near future.
Moreover, some analysts, including investment banks, believe that even a soft CPI reading in January won’t lead the Fed to shift its hawkish stance. During his testimony before Congress on Tuesday, Fed Chairman Jerome Powell indicated that the central bank isn’t rushing to cut rates.
RBC’s weekly report suggests that inflation’s progress won’t be enough to trigger additional rate cuts this year, while BlackRock noted that persistent inflation in services will likely prevent the Fed from reducing rates soon.
If the CPI report surprises to the upside, bitcoin may edge closer to the lower range of its current $90K-$110K price range.
