Cooling Off, Or Just A Breeze? 

Markets have been waiting for a reason to move and this week, they got one. US inflation landed softer (lower) than what was expected on Tuesday at 10:30pm AEST. Following the data release, crypto markets moved higher, with Bitcoin gaining +4% and Ethereum +7% at this time of writing.  

We touched on this in last week’s Squawk, mapping out how recent escalations abroad still pose a risk to this headline reduction in inflation. More on that soon.   

But this shift matters for US economic policy, and by extension, how risk assets like Bitcoin could move going forward. Let's dig in. 

One meeting away

The decision makers that I spoke about earlier are known as the Federal Open Markets Committee (FOMC). They recently have been appointed a new Chair, Mr Kevin Warsh (or as I like to call him, Big Kev), who you might have seen circulating in the news and headlines over the last few months.  

He’s been dubbed by some as the man who will deliver the agenda of the White House, and in other capacities he’s been built up to be quite the opposite. The ideology underpinning his reign is still taking shape. 

But what we do know is that in his first public statement as Fed Chair, Warsh showed calm composure and consistency with the messaging we have heard since inflation shifted policy to higher rates back in 2022. He stuck to the script: policy makers are committed to the 2% inflation target.  

Inflation is one of the two key mandates policy makers in the US are responsible for, with jobs and growth being the other.  

So very simply, elevated inflation was a key blocker to any easing of financial conditions (such as rates coming lower) – and now we are seeing inflation come down again.  

If inflation continues cooling, it opens the door for potentially looser financial conditions later in the year, and historically, that's the kind of environment where risk assets like crypto tend to perform. But one print isn't a trend. 

And that's where the chart of the week comes in. 

Chart of the week:  Is the market buying it?

One way to measure the conviction of the market, relative to the past, is looking at a chart of Bitcoin to understand how much the market is willing to pay for BTC relative to the past.   

So while the last week has been quite positive in terms of price movement, when we zoom out there is still no evidence the market is willing to pay more for Bitcoin than it did in mid-June, where we have our most recent Previous High marked out.  

The bullish and bearish pathways ahead could hinge off this previous high. Failure to see interest in the market above this range could see us head lower, while a push through gives us a new higher high – something worth watching in the weeks ahead.  

Now, if we take it back to the news on inflation, does this mean it’s good news ahead?  

That’s the one thing we don’t know and will be looking to understand. This week we’ve learned the market is responding positively towards digital asset markets with this recent shift in the winds for inflation, but again – it’s just a single shift in data, not a trend yet.  

Policy makers look to make decisions on a cyclical basis; they zoom out. So, my interpretation of this is they’ll need to see a longer-term trend of inflation coming down. Not a single month's data.  

And that’s where we wait to see if the tensions abroad are here to stay, or just a temporary agitation. Extended friction internationally means this trend for lower inflation could be harder to land.  

Hope this one helped connect the dots. Catch you again next week.

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