Cryptocurrency faces dual pressure from two major central banks to increase interest rate expectatio

Core Points

The probability of the Federal Reserve raising interest rates in September is close to 70%. The total market value of cryptocurrencies fell by about 2%, while altcoins fell significantly. The Core Consumer Price Index (Core CPI) will be the next key test point. Energy prices link two different interest rate paths.

Energy prices connect different interest rate paths in Europe and the United States

The European Central Bank raised its deposit rate by 25 basis points to 2.5% on Thursday, completing its second rate hike this year. This move is generally expected. The more important development for the market is the continued rise in energy prices and bond yields. Crude oil prices climbed above $105 a barrel, while German interest-sensitive two-year government bond yields hit about 3.07%, the highest level in more than two years.

In the United States, the producer price index (PPI) rose 5.4% year-on-year, slightly above market expectations of 5.3%. The report prompted traders to increase the probability that the Fed will raise interest rates at its September meeting. Our independent analysis explores what a PPI reading of 5.4% in the United States means for cryptocurrencies.

Energy costs link dynamics in Europe and the United States, but the two interest rate paths are not exactly the same. The European Central Bank has taken action, and the Federal Reserve's decision remains in the balance and will largely depend on the next consumer inflation report.

Crypto asset losses spread beyond Bitcoin

As of writing, data shows that the total market value of cryptocurrencies has fallen by approximately 2% in 24 hours. Bitcoin traded around $77,000 after losing about 2%, and Ethereum also fell about 2%. Major altcoins fell even more: BNB and XRP fell about 4%, Solana fell about 3%, and Dogecoin fell about 6%.

The broader decline in altcoins is consistent with investors 'actions to reduce risk. Smaller crypto assets are generally less liquid and have more speculative positions than Bitcoin, so their prices are more vulnerable to shocks when traders reduce leveraged positions. During the same period, CoinMarketCap recorded approximately US$460 million in crypto asset liquidations, of which approximately US$390 million were long positions. These data suggest that leveraged bullish positions were forcibly closed, which may have increased short-term selling pressure.

The timing is consistent with the broader reaction to rising interest rates and bond yields, but macroeconomic news does not explain the entire decline. Higher oil prices, weak stock markets and leverage already existing in crypto derivatives also affected trading.

FedWatch measures trading expectations, not certainty

According to data from the CME FedWatch tool, the implied probability of a quarterly rate hike after the producer price report is released reaches 69.8%, up from about 64%. FedWatch's probability comes from the price of 30-day federal funds futures. These prices change as traders adjust their expectations for the level of the effective federal funds rate after each policy meeting. As a result, the reading reflects a snapshot of market positions rather than a poll of Fed officials or a commitment to central bank action.

The contract implies a 69.8% probability of a 25 basis point rate hike at the September 15-16 meeting. This move will increase the Fed's target range from 3.50%-3.75% to 3.75%-4.00%.

The monthly PPI increase of 0.4% was in line with forecasts, but the annualized rate was slightly higher than expectations. Final demand commodity prices rose 1.1%, including a 4.2% increase in energy prices, while service prices rose slightly by 0.1%. Transportation and storage costs have also increased.

Data does not show that inflation is equally strong in all categories. However, this gives traders less reason to expect the Fed to ignore recent increases in energy and business costs.

Impact of two major interest rate channels on the crypto market

European Central Bank status: Interest rate hikes have been completed
Deposit rate: 2.5%
Next test: Energy and wage inflation

Federal Reserve status: Decision to be determined
Current range: 3.50%-3.75%
Next test: August core CPI

Higher interest rates first affect competition for investment capital. Bitcoin itself does not provide native benefits. Ethereum pledges and crypto lending can generate returns, but they introduce token price, custody, verifier, or smart contract risks that are typically avoided by short-term core U.S. and eurozone government debt.

As government yields rise, investors can achieve higher returns without suffering the volatility of cryptocurrencies. This could reduce demand for digital assets, especially among hedge funds that move funds between bonds, stocks and cryptocurrencies.

The second channel is financing. The central bank's policy rate does not directly set the financing rate for encrypted perpetual futures, which is determined by positions in the derivatives market. But they do affect borrowing costs, collateral conditions and the amount an institution is willing to lend or invest.

This is why the widely expected ECB rate hike can still affect cryptocurrencies. The decision itself may be reflected in prices, but expectations of further tightening of European policy make it difficult for investors to assume that global financing conditions will soon relax. A possible Fed rate hike will add pressure on the U.S. dollar market, as most crypto trading and lending remain concentrated here.

U.S. CPI will determine whether Fed risks persist

The Consumer Price Index (CPI) released on Friday is expected to show that overall inflation rose 0.4% month-on-month and 3.4% year-on-year in August. Economists forecast a month-on-month increase of 0.2%, with an annualized core ratio of 2.4%.

The Federal Reserve officially targets inflation rather than CPI through the Personal Consumption Expenditure Price Index (PCE). However, the CPI will provide important information on housing, services and other consumer costs and help economists refine their estimates for the next PCE report.

If the core reading falls below the monthly forecast of 0.2%, it will weaken evidence that inflationary pressures extend beyond the energy range. If it exceeds expectations, it will strengthen the case for raising interest rates and may push up short-term government bond yields.

Crypto traders can assess reactions through four indicators:

• FedWatch: After the CPI was announced, whether a September rate hike is still a basic case for the market.
• U.S. Two-Year Yield: Whether short-term interest rate expectations continue to push up borrowing costs.
• Oil and European yields: Whether pressure for the ECB to raise interest rates continues.
• Crypto market breadth: As clearing slows, whether altcoins continue to underperform Bitcoin.

If Bitcoin stabilizes and altcoins remain weak, it suggests that speculative positions are still declining. A broader recovery accompanied by falling short-term bond yields will provide stronger evidence that macro pressures are easing.

Friday's CPI will determine whether the U.S. side of the pressure strengthens or begins to ease. Pressure from Europe is already in place.

This document is for reference only and does not constitute financial advice.