With the Bitcoin price posting a small gain of over 1.5% over the last seven days, the market is in for a blockbuster next week.
The release of the Consumer Price Index (CPI) on December 13, Tuesday at 08:30 AM ET, will once again be “the most important CPI ever”.
Just one day later, on December 14, Wednesday at 2:00 PM ET, the final Federal Open Market Committee (FOMC) meeting of the year will take place. Remarkably, FED members will release their updated forecasts for inflation and interest rates (dot plot) at the meeting.
A Blockbuster Week
The dot plot is released only four times a year – in March, June, September, and December – and presents the FOMC’s economic projections, which look at GDP, unemployment rates, and inflation for the coming months as well as over the longer term.
Within the dot plot, each member of the Committee publishes its view of potential interest rates over the longer term.
For investors, this is extremely useful information as it allows market participants to see if the consensus path for longer-term interest rates is changing.
The markets, as well as Bitcoin investors, will therefore be eagerly watching the inflation forecasts for next year, as well as the interest rate expectations for 2023 and 2024.
As economic journalist Colby Smith wrote in November, the September dot plot showed most officials favored a slowdown to 50 basis points in December.
The question for next week will be whether the Fed, led by Powell, will put into play a slower rate hike pace of 25 basis points (bps) or even a pivot.
The Fed introduced the notion of slowing down the pace of hikes in July and the September dot plot showed support from most officials for a downshift to 50bps in December. The question today is how far Powell goes to ratify that move https://t.co/Pn8n0lh4kZ @FinancialTimes pic.twitter.com/62XOqMlm3T
— Colby Smith (@colbyLsmith) November 2, 2022
A Year-End Rally for Bitcoin?
These two events could be the “last remaining hurdles” for a year-end rally for Bitcoin, QCP Capital wrote in an analysis.
However, a higher-than-expected consumer price index and a tighter stance by the Federal Reserve could derail that rally, as was seen in the April and August reversals.
On the other hand, further disinflation could lead many to seek a continuation of the rally through the end of the year, according to QCP Capital’s analysis. It goes on to say that the question markets now face is where inflation will bottom.
Even if 2% inflation is out of reach next year, will it fall low enough such that the Fed will have room to cut rates while keeping real rates positive?
Therefore, one key market theme for next year will be the shift from ‘peak inflation’ to ‘trough inflation’.
This is another reason why the dot plot is of paramount importance. As the last two releases show, Powell has stuck relatively strictly to projections regarding interest rates. Thus, the dot plot could reveal some insights into Powell’s thoughts about a pivot.
If the new data matches CPI expectations, it would be the fifth consecutive monthly decline. After peaking at 9.1% YoY in June. Next week’s reading could be even the lowest since January.
Will Powell Follow His Words
Given Powell’s recent comments to the Brookings Institute on November 30, it is also likely that the FED will stick to the script and raise the policy rate by only 50 basis points to 4.5%, reinforcing bullish sentiment in the market.
If the CPI even comes in below expectations, markets could frontrun the Fed’s decision and trigger an end-of-year rally. In any case, next week will provide blockbuster volatility in the Bitcoin and crypto markets.
Investors should pay close attention to the release of the FED’s dot plot.
At press time, Bitcoin was trading at $17,228, showing signs of strength ahead of the FOMC meeting.
Bitcoin price, 4-hour chart. Source: TradingView