Yesterday, we saw the start of a crucial battle for confidence in the financial system. The acceleration in US CPI to 6.2% YoY first was taken as the Fed losing control over inflation.
As a result, we saw a powerful rally in cryptocurrencies and precious metals, which added more than 2% after the data was released. Bitcoin set a new all-time high of $69,000.
Buying non-inflationary assets was investors’ first reaction to US price data. This reaction put the US on par with emerging markets, from which investors are fleeing on signs that the central bank is failing to curb prices.
A sustained reaction of this type would have had far-reaching consequences. However, towards the close of the US session, the debt market began to lay down more decisive and speedy Fed rate hikes, which triggered a strong capital inflow into the US dollar and reversed the initial reaction. In effect, this is bad news for bitcoin. At least for now.
At the close of the US session, BTC found itself pushed back to the $64,500 area, 6.5% below peak, where it could consolidate in a narrow range. The fall in the significant altcoins was commensurate, but given the initial surge, the losses over the day are not that great - 3% for BTC, -1.5% Ethereum and -2.2% for total cryptocurrency capitalization.
Perhaps in the coming days, we will find out which side is right. At the end of the day on Wednesday, traditional financials should still win. The sell-off in cryptocurrencies and the dollar’s highs against a basket of major currencies for more than a year points towards the belief that the Fed has enough gunpower to fight inflation, and it will use it.