Bitcoin at Risk of Losses on Equity Weakness, US Dollar Strength

Talking Points:

• Bitcoin is at risk of breaking lower if core inflation comes in above consensus estimates.

• The cryptocurrency’s strong positive relationship with equities and gold suggest further losses are at hand in the near-term.

Bitcoin prices have oscillated in a tight range between $19,000 and $24,000 for the last five months, as investors attempt to gauge the trajectory of the Federal Reserve’s rate hiking cycle amid the most significant inflationary pressures in four decades. The largest cryptocurrency by market capitalization has displayed a strong positive correlation with US benchmark equity indices and risk-assets in general over the last two years. It has also shown a strong correlation with the price of gold, which is heavily impacted by real rates of return that have pushed back into positive territory for the first time since before the Covid-19 induced downturn of February 2020. With that in mind, the popular cryptocurrency could be at risk of collapsing below key support in the short-term, if upcoming consumer price data justifies more aggressive measures from the Federal Reserve.

Bitcoin Inverse Relationship with US 10-Year Real Rates

Yesterday’s Producer Price Index release could be enough to encourage further tightening, registering its first increase in three months and coming in at twice the market expectations of a 0.2% rise. However, the final nail in the coffin for market participants expecting a dovish pivot from the US central bank would be a hotter-than-forecast CPI print later today. Core inflation – which strips out volatile components such as food and energy costs – is tipped to have climbed to 6.5% from 6.3% last month, as a sustained increase in rents and shelter costs filter into the survey. An upside beat to this estimate, in combination with last week’s robust non-farm payrolls report, could ultimately trigger a sharp sell-off in risk assets – whether it be equities, cryptocurrencies or high-beta currencies – as investors price in a higher terminal Fed Funds rate.

Bitcoin Daily Price Chart – Levitating Precariously Above Key Support

From a technical perspective, the outlook for Bitcoin appears relatively neutral as prices continue to consolidate above key support at $19,000.

Indeed, with the RSI tracking at its neutral midpoint of 50 and price contained within the middle channel of the Keltner Channel envelope, a directional bias is hard to determine.

Nevertheless, a daily close below range support at $19,000 would likely induce a sharp sell-off and bring psychological support at $15,000 and $10,000 into sellers’ crosshairs.

On the other hand, gaining a firm foothold back above the monthly high (20469) could kickstart a short-term rally to challenge the September high (22781).

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