Bitcoin and altcoins are seeing strong selling pressure following the release of the US Consumer Price Index (CPI) for August. Prices have dropped more than 1% year-over-year, aligning with expectations, and down from the previous 2.9%.
Market Reaction to CPI Report
Bitcoin and altcoins continue to adopt a wait-and-watch approach before making any big moves as futures for all three US indices remained in negative territory. With expectations for a significant 50 basis points rate cut by the Federal Reserve (Fed) reducing, traders are now predicting the Fed will begin its rate cut cycle next week with a 25 basis points reduction.
Criticism of Fed Approach
Some analysts have expressed concerns over the timing of the Federal Reserve’s (Fed) responses to economic conditions. Critics argue that the Fed’s inflation mandate is reactive, focusing on lagging indicators such as inflation, which causes delays in adjusting interest rates. Historically, in the last two instances where the Fed lagged behind the 2-year Treasury yield as much as it does today, it initiated rate cuts with a 50 basis point reduction.
Yen Carry Trade and Its Consequences
Today, the USD/JPY currency pair hit its lowest level in 2024, reaching 140, triggering fears of another yen carry trade unwind. During the last unwind in August 2024, Bitcoin prices dropped 15% in a single day. Bitcoin critic Peter Schiff stated that the drop in the US dollar below 142 yen has caused significant pressure to unwind the yen carry trade, negatively affecting long-term Treasuries and risk assets. Michael Wilson from Morgan Stanley noted that significant programmatic Fed rate cuts could further escalate the yen carry trade unwind.
Fed rate cuts and the yen carry trade situation are putting significant pressure on cryptocurrencies, despite the decrease in inflation. Analysts urge caution in evaluating economic scenarios and making decisions.
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