Bitcoin May See Gains from Soft U.S. CPI, Major Risk-On Surge in BTC Appears Unlikely

A soft U.S. inflation report later Wednesday will likely bode well for risk assets, including bitcoin (BTC). But those expecting bullish fireworks may be disappointed.

The Labor Department will publish January's consumer price index (CPI) report on Wednesday at 13:30 UTC. It's expected to show that the cost of living increased by 0.3% month-on-month in January, slowing down from December's 0.4% rise, according to Reuters estimates tracked by FXStreet. The annualized figure is expected to match December's 2.9% reading.

The core inflation, which strips out the volatile food and energy component, is forecast to have risen to 0.3% month-over-month from 0.2%, resulting in an annualized reading of 3.1%, down from December's 3.2%.

Lower-than-expected data, particularly the core figure, will likely bolster expectations for further Federal Reserve (Fed) interest rate cuts, which could lead to lower Treasury yields and a weaker dollar index, ultimately boosting demand for riskier assets. According to CME's FedWatch tool, the market currently estimates a 54% chance that the Fed will either cut interest rates once or not at all this year.

While a potential adjustment in Fed rate cuts could lift BTC, it is unlikely to be the sole catalyst for a breakout from the ongoing consolidation between $90,000 and $110,000.

This is due to forward-looking market metrics indicating higher inflation in the coming months amid trade war fears, suggesting that the Fed may have a limited window to implement aggressive rate cuts.

Data tracked by Mott Capital Management shows that two-year inflation swaps have climbed to nearly 2.8%, the highest since early 2023. The five-year swap is exhibiting a similar trend. Higher inflation swaps indicate that the market is expecting inflation rates to rise in the future, prompting investors to pay a higher premium to protect themselves against potential purchasing power loss by entering into swap contracts tied to CPI.

In other words, the ongoing uptick in these metrics indicate that the progress in inflation toward the Fed's 2% target has stalled, and price pressures are likely to increase over the coming years, probably due to Trump's tariffs.

Plus, some investment banks believe a soft January CPI reading won't see the Fed move away from its hawkish rate guidance. In his testimony to Congress Tuesday, Chairman Jerome Powell said the central bank is in no hurry to cut rates.

"We don’t expect that progress on inflation will be enough to prompt additional interest rate cuts from the Fed this year," RBC's weekly note said, adding that January's report will show limited easing in price pressures.

BlackRock said the persistent services inflation will keep the Fed from cutting rates.

"We get U.S. CPI for January this week. Even as December’s CPI report showed signs of inflation pressures easing, wage growth remains above the level that would allow inflation to recede back to the Federal Reserve’s 2% target, in our view. We see persistent services inflation forcing the Fed to keep rates higher for longer," BlackRock said.

Lastly, BTC may move closer to the lower end of its $90K-$110K trading range should the CPI print hotter than expected.