Financial markets are off to a flying start in 2023 with a surprisingly positive performance of equities in the most offensive sectors of the stock market. As for the cryptocurrency market, it has offered a small bounce, but with little volume. The risk now is that all of these moves will be reversed by disappointment in US inflation data.
Bitcoin, the key issue of US inflation data
Stock market records a surprising bullish performance since the beginning of the year, especially the major European stock indexes which are almost back in touch with their all-time highs. In parallel with this increase in equities in the most cyclical sectors, bond interest rates have stabilized and the US dollar is now more than 10% down on the floating foreign exchange market since last October.
In the pre-FTX world, all this equity movement between asset classes would have caused a sharp increase in the price of the cryptocurrency market; but the latter is still largely hampered by the crisis of confidence in the major crypto intermediaries, as well as its decline of more than 70% since its all-time peak in November 2021.
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The rise in risky assets in early 2023 was shaped by investors’ belief that the disinflation process is well underway. The inflation rate in the US rose from 9% to 7.1% in the space of three months and the consensus for this Thursday 12 January stands at 6.5%. This is precisely where there is a market risk because the consensus is very optimistic. The risk for the stock market and for the price of bitcoin is that inflation will slow down much less than expected.
This ongoing disinflation is fueling hopes that the US Federal Reserve (FED) will stick to a 5% rate for its terminal feeand then make its famous “pivot” during the first quarter of 2023. But a rebound in the price regime would disrupt this fundamental narrative and pose a large market risk for high-beta assets on the stock exchange.
The answer, during the US CPI release this Thursday, January 12 at 2:30pm.
Graph showing the evolution of the components of the annual rate of inflation in the United States
In terms of technical analysis of the bitcoin price, here is a reminder of the dominant graphic factors of the moment:
- An uptrend line that joins all the most salient lows of the weekly time horizon of the last 5 years;
- The $16K price which represents a 50% retracement of the entire increase from the low point of the health crisis;
- The price of 12,000 dollars that the doxa is waiting impatiently (be careful with the consensus, sometimes it is taken the wrong way);
- The $20K resistance that must be overcome to turn bullish.
The chart displaying the weekly closing price of bitcoin juxtaposes its 7-day realized volatility
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The trend of the US dollar will act by correlation on Bitcoin in this beginning of the year 2023
Finally, to conclude this new contribution within the Cryptoast columns, I draw your attention to the level of support that the US dollar has returned to on Forex. The most favorable scenario for the cryptocurrency market would be for the US dollar to break this support, at least if it does not offer a strong bullish bouncedue to inverse correlation with the cryptocurrency market.
Chart displaying Japanese candlesticks in US dollar (DXY) weekly data against a basket of major Forex currencies
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