What could this mean for Bitcoin?

Can Bitcoin’s price hold above critical support levels as the market digests decreasing inflation and yen trading risks?

A brief look at inflation figures

Inflation is like the temperature in a room—too hot is uncomfortable; too cold is equally bad. Over the past few months, the U.S. economy has been trying to find that “just right” spot, and all eyes are on the latest numbers to see where we go next.

The July 2024 Producer Price Index data just came in and shows that inflation is easing. PPI inflation fell slightly below expectations to 2.2%, the lowest level since March 2024.

BREAKING NEWS: July PPI inflation fell to 2.2%, below expectations of 2.3%.

Core PPI inflation fell to 2.4%, below expectations of 2.7%.

Another constructive sign is that PPI inflation is at its lowest level since March 2024.

Interest rate cut coming in September.

— Kobeissi Letter (@KobeissiLetter) August 13, 2024

Core PPI inflation also fell to 2.4%, surprising many who expected it to be higher. With figures like these, a September rate cut seems almost certain.

But the story doesn’t end there. The bigger headline everyone is waiting for is the Consumer Price Index (CPI) data, scheduled to be released on August 14.

This data is critical because it shows more clearly how much daily prices increase or decrease, affecting everyone from the average consumer to large investors.

Wall Street is predicting a 2.9% increase, but there’s a 37% chance it’s still higher than expected. If it rises above 3.0%, it could be a sign that inflation is rising again, the third time in five months. That could change everything from interest rates to market expectations.

Tomorrow’s CPI inflation data is critical:

The current consensus expectation on Wall Street is 2.9%.

However, there is a 37% chance that inflation will be ABOVE 2.9%. @Kalshi.

There is also an 11% chance that inflation will rise above 3.0%, which… picture.twitter.com/JgPKAHuI0j

— Kobeissi Letter (@KobeissiLetter) August 13, 2024

But inflation isn’t the only concern. Just a few days ago, on Aug. 5, financial markets were rocked by the pullback of yen carry trades.

For those who don’t know, a yen carry trade involves borrowing in Japan’s low interest rate environment and investing in higher-yielding assets elsewhere.

This strategy worked flawlessly until Japan’s interest rates started to rise, as they recently rose for the second time since 2007, the first occurring in March 2024. The result was market turmoil, and the risk from this trade has yet to be fully eliminated.

As we await CPI data and grapple with the ongoing risks from the yen carry trade, the question remains: Could these global financial uncertainties pull the rug out from under cryptocurrencies? Let’s find out.

Yen carry trade uncertainty continues to cloud the market

While recent inflation data points to cooling in the U.S., risks associated with yen carry trades remain a growing threat that could heavily impact global markets, including the crypto space.

The unraveling of this massive trade, estimated by Reuters to be worth up to $4 trillion, sent shockwaves through global financial markets and triggered a sell-off in risky assets like Bitcoin (BTC), which fell to as low as $49,000 on August 5.

Since then, BTC has managed to recover and as of August 13, it is trading at $61,000, up nearly 24%.

BTC 6-month price chart | Source: TradingView

Richard Kelly, head of global strategy at TD Securities, told CNBC that he would be “very hesitant” to announce the end of carry trading.

He believes the depreciation of the yen and possible changes in interest rate differentials could lead to further disruption in markets over the next year or two.

Moreover, as Barclays analysts note, the selling pressure from the carry trade pullback does not appear to have completely subsided. They warn that it is ‘too early’ to say that all is well with the pullback and that volatility is likely to remain high.

These ongoing risks for the crypto market pose a two-fold challenge: A strong yen could drive investors away from high-yielding but riskier assets, while at the same time a sharp correction in the market could erode crypto investors’ confidence.

What’s happening in the market?

While the crypto market is facing turbulent times, Bitcoin is also facing its own challenges. According to Copper Research’s “Opening Bell” report, Bitcoin’s recent performance has been lackluster.

Bitcoin is struggling to regain the momentum it gained after reaching an all-time high in March, despite resisting the German government’s decision to sell 40,000 units.

The report highlights that overall market conditions remain challenging due to a series of global events, including the US elections, riots in the UK, tensions in the Middle East and changes in Japanese central bank policies.

What is particularly striking is the lack of buying activity in Bitcoin. Initially, when the German sell-off occurred, some market participants bought, seeing the decline as an opportunity.

However, recent market volatility has spooked many investors and caused buying activity in Bitcoin to decline.

However, there is a silver lining. Recent data shows a noticeable increase in inflows into Bitcoin and Ethereum ETFs (ETH) over the past two days.

And after the BTC decline of the last 2 weeks subsided (although it has recovered a bit), YTD net total flows reached ATH at +$19 billion, which is surprisingly strong all things considered (again, this number is the most important metric to measure success in my opinion because of net price action and GBTC unlocks). pic.twitter.com/AuJ189ttVw

— Eric Balchunas (@EricBalchunas) August 12, 2024

On August 13, a total of $38.94 million inflows were recorded across 12 spot Bitcoin ETFs, representing an increase of nearly 40% from the $27.87 million recorded the previous day.

Leading the way in this rise was BlackRock’s IBIT fund, which has seen $34.6 million in inflows since its launch, bringing its total to $20.36 billion.

Ethereum has also seen increased interest. The nine-point Ethereum ETF saw net inflows of $24.3 million on Aug. 13, a jump from a modest $5 million the day before. BlackRock’s ETHA fund led the way with inflows of $49.1 million after a day of no activity.

What to expect next?

Current data suggests the market is at a critical juncture, raising the question: Where do we go from here? One thing is for sure: Bitcoin’s next move could determine the direction of the entire crypto market in the coming weeks.

Famous cryptocurrency analyst Michaël van de Poppe stated that Bitcoin is going through a period of ups and downs and its immediate future depends on whether it can hold above the $56,000 to $57,500 range.

It will be an important week in macroeconomic terms, with PPI, CPI and more data being released.#Bitcoin relatively volatile; from a lower time frame TA perspective, I would like to see #Bitcoin It may remain above the $56-57.5 thousand level and from there an increase towards the other side of the range may occur.

The other side would be a new ATH. pic.twitter.com/qgHQWh5trp

— Michaël van de Poppe (@CryptoMichNL) August 13, 2024

He suggests that if Bitcoin manages to stay in this region, there is the potential for a rally towards the upper end of the range, which could possibly lead to a new all-time high.

Meanwhile, the surge in inflows into Bitcoin and Ethereum ETFs suggests that institutional investors are still interested, albeit cautiously. However, if volatility continues, we could see more sideways movement or worse, another downtrend.

For now, it’s a waiting game. If the macroeconomic environment stabilizes, Bitcoin could break out of its current range and make a run for new highs. So, be careful, trade wisely, and never invest more than you can afford to lose.