Bitcoin Rises But Not For Long

The cryptocurrency market keeps showing signs of growth. Since the end of January, the BTC/USD rate has recovered from a multi-month low of around $33,000 and reached $44,000. In just a few weeks, the world's most popular cryptocurrency has added more than 30%, making bitcoin the most profitable investment across all financial markets sectors once again. Despite the upside from such performance, many analysts believe that current growth looks more like a correction ahead of a bigger decline. We share a similar opinion.

Market participants tend to associate the cryptocurrency market movements with the release of macroeconomic data in the United States, which directly affects the monetary policy prospects in the country. The latest jump in the cryptocurrency market capitalization was driven by the positive data from the US labor market in January, which indicated the recovery of the national economy. However, market sentiment quickly shifted after the release of January inflation data. The consumer price index reached a new record high, rising to 7.5% against the expected 7.3%. These data triggered concerns that the US Federal Reserve will settle on a bigger rate increase in March, raising its interest rate by 0.50% or more instead of the expected 0.25%.

This week the producer price index was released. It's generally considered a leading indicator that measures inflation. According to the published data, the US Producer Price Index (PPI) added 1.% month-over-month in January, well ahead of the consensus forecast of 0.5% MoM. The index also surged 9.7% year-over-year, outpacing estimates for a 9.1% increase. The report suggests that headline inflation in the US is likely to keep rising as manufacturers continue to pass on those higher production costs to consumers.

Higher inflation, in turn, will further support the need for aggressive rate hikes in the US. In an interview with CNBC on Monday, St. Louis Federal Reserve President James Bullard stood firm on his call for a 100 basis points hike over the next three meetings. In his opinion, the January inflation report fully justifies the decisive action of the regulator in this direction as early as March. While not all members of the Federal Reserve board of governors share Bullard's hawkish stance, the vast majority agree that the Fed should raise its rate by at least 0.5% at its March 16 meeting.

Against this backdrop, the "bearish" outlook for BTC is due to expectations that monetary policy tightening in the US will drive the dollar higher. Considering that bitcoin's purpose was to ensure the safety of assets during periods of distrust in traditional money, the current economic conditions, on the contrary, clearly indicate that there is no better candidate for long-term purchases than the US dollar. If market sentiment remains unchanged, the cryptocurrency market will likely remain under pressure. As a result, BTC/USD may well sink even lower and test the long-term support of $30,000.