With the US Dollar inversely correlated to BTC, the lower-than-expected CPI of 8.5% could see Bitcoin rally.
Onchain data shows that since 2016, the US Dollar index (DXY) has maintained a strong inverse relationship with BTC. In simple terms, when the dollar’s value rises, the Bitcoin’s value falls and vice versa. Currently, that correlation sits at a 5-year high of -0.87 following Bitcoin’s over 50% decline since 2021 and the dollar’s 15% appreciation in the same period.
Source: Delphi Digital
The DXY calculates how much the US Dollar is worth against a group of international currencies. These are Euro (EUR), Japanese yen (JPY), British pound (GBP), Canadian dollar (CAD), Swedish krona (SEK), and Swiss franc (CHF). Of the six, Euro has the most significant weight at 57.6%, while the Swiss franc has the least weight.
Source: theice.com
Recently, the DXY traded at 108.60, a 20-year high. Combining this with US inflation reaching a four-decade high is baffling. However, it is essential to note that except for Switzerland, all the other economies involved are worse off than the US. The Russia-Ukraine war and sanctions meted on Russia have all combined to create an energy crisis in the Russia-dependent Eurozone.
Consequently, the DXY’s inverse correlation with Bitcoin indicates that the foremost digital asset may continue to suffer its price decline. However, the current macro climate with surging inflation and interest rate hikes could present an opportunity for a defined break in the DYX strength to allow Bitcoin to rally.
CPI Data For August Lower Than Anticipated
The latest consumer price index (CPI) data, released by the U.S. Bureau of Labor Statistics, shows that inflation in July was 8.5%. This beat the generally anticipated value of 8.7% expected after the Federal Reserve’s consecutive 0.75 basis points (BPS) interest rate hike in June and July.
After inflation peaked at 9.1% in June, the new number shows that year-over-year inflation decreased in July. Analysts expected a 6.1% increase in the core CPI, which excludes volatile energy and food costs, but it came in at 5.9% year over year.
Consequently, the new data indicates that the Fed’s hawkishness has been able to curtail inflation which has surged since the invasion in Europe and Covid pandemic. With the highly anticipated number now out, the market’s attention has turned to the Feds for its next move.
Despite the reduced inflation, market participants do not expect the Feds to ease off its hawkishness. Many are split on whether the FEds would hike interest rates by 50 bps or 75 bps at its next meeting.
Bitcoin Rallies As DXY Slumps
Bitcoin and the entire digital assets industry rallied in response to the latest CPI data. According to CoinGecko data, Bitcoin reached a high of $24,490, a 6.3% increase in the last 24 hours. Similarly, Ethereum, which has been performing well ahead of its upcoming merge, has reached a high of $1,889, an 11.4% rise. Consequently, the surge has caused the market capitalization of all cryptocurrencies to cross the $1.17 trillion mark. However, it is still 61% below its peak of $3 trillion reached in November 2021.
Meanwhile, as Bitcoin rallies, the US Dollar index has fallen to its lowest value since July 2022. The DXY has slumped by over 1% in the last 24 hours. However, as seen in the chart, it has been in a steady decline since its peak of $108.60 in July. So far, the index has fallen by 3.1% to its current value of $105.16.
Do you think Inflation easing would signal a sustained rally in Bitcoin’s price and a slump in the DYX’s value? Let us know your thoughts in the comments below.
Chris is a crypto enthusiast and a firm believer in the blockchain’s ability to create a new financial paradigm. Through writing, Chris hopes to expose the intricacies of this disruptive technology and how it is beneficial to Africans and developing countries. He aims to give readers a rational and unbiased outlook of the industry by equipping them with the necessary information to make enlightened investment decisions.
