Bitcoin rebounds above $78000, probability of a Federal Reserve rate hike rises to 81%

Bitcoin rebounds above $78,000: U.S. inflation data is in line with expectations, but the probability of a Fed rate hike rises to 81%

Summary:

• The U.S. consumer price index (CPI) rose 3.4% year-on-year and 0.4% month-on-month from July to August.
• Bitcoin rebounded to above $78,000 after falling below the psychological barrier of $77,000.
• Although annual inflation slowed to 2.4%, core monthly inflation exceeded forecasts.
• Polymarket traders raised the probability of a 25 basis point rate hike by the Federal Reserve next week to 81%.

The U.S. CPI remained at 3.4% in August

Data released by the U.S. Bureau of Labor Statistics on Friday showed that the seasonally adjusted August consumer price index (CPI) rose 0.4% month-on-month, compared with a 0.1% increase in July. In the past 12 months, consumer prices have risen by 3.4%, in line with the annualized growth rate in July. Both data are consistent with the predictions cited in the original report. However, inflation remains above the Fed's 2% target, and officials are preparing for a policy meeting on September 15 - 16.

Energy costs were the main driver of growth this month. According to the Bureau of Labor Statistics, the energy index rose 2.1% in August, with gasoline prices rising 3.9%, contributing more than one-third to the overall index. Housing costs increased 0.3%, and food prices rose 0.1%.

Significantly, while annual energy inflation hit 16.3 percent-driven in part by a 27.4 percent surge in gasoline prices and a 52 percent rise in fuel oil prices-food costs are only 2.7 percent higher than a year ago, and the household food index rose 2.2 percent.

Core CPI excluding food and energy increased 0.3% from July to August. The monthly reading exceeded the 0.2% forecast quoted in the original report, sending another signal to policymakers that underlying price pressures have not fully eased. However, from an annual perspective, core inflation fell to 2.4% in August from 2.5% in July, the lowest level since 2021. Housing prices rose 3% year-on-year, and prices for services other than energy services also increased 3%.

Several factors pushed up core prices in August. The Bureau of Labor Statistics records show that air ticket prices increased 2.7% month-on-month, out-of-home accommodation prices increased 2.4%, and communication costs increased 2.3%. Used car prices rose 0.4%, and new car prices rose 0.3%. Medical expenses fell 0.2%, with dental services falling 0.6%. Motor vehicle insurance fell 0.8%, while entertainment and clothing prices remained unchanged.

Bitcoin prices recover US$78,000 mark

After the release of data at 8:30 am ET, TradingView data showed that Bitcoin recovered from below US$77,000 and broke through the US$78,000 mark. The rally was in response to a sell-off triggered by a higher producer price index (PPI) released the day before.

The same data showed that Ether also returned above $2,500, while Solana regained the $100 mark. These two levels have served as psychological thresholds during previous market declines.

The CPI response reversed a previous weakening trend caused by the producer price index (PPI) rising annualized to 5.4% in August (slightly higher than the 5.3% estimate quoted in the original report). After the PPI was released, cryptocurrency prices fell for a while as traders increased their bets on tighter monetary policy in the United States.

Bitcoin was also under pressure from strong employment data as it entered its latest inflation report. It was previously reported that U.S. employers added 162,000 jobs in August, far exceeding the Reuters forecast of 56,000, while the unemployment rate remained at 4.1%. Bitcoin initially hit about $82,262 after the employment data was released, and then fell below $80,000. The report also showed that average hourly wages increased 0.3% month-on-month from July and 3.1% year-on-year, adding wage data to factors Fed officials must consider.

After the employment report was released, federal funds futures increased the probability of a September rate hike to 61% from the previous 52%. The two-year bond yield climbed 5 basis points to 4.38%, while the 10-year yield reached 4.776%.

The probability of the Fed raising interest rates has climbed to 81%

According to real-time reports from MarketWatch, after Friday's CPI report, Polymarket traders gave the September meeting a 25 basis point probability of raising interest rates at an 81%. Prior to this, the implied probability was close to 59%, while the probability of no change dropped from 41% to about 20%.

The price of Polymarket represents the bets placed by participants and may change throughout the trading process. They are not official Fed forecasts, nor are they a direct measure of Federal Open Market Committee members 'voting intentions.

The current federal funds target range is 3.50% to 3.75%. A 25 basis point rate hike would raise it to 3.75% to 4%, the first time the Fed has raised interest rates since July 2023.

Before the CPI report was released, a September policy analysis found that CME FedWatch set the probability of a 25 basis point rate hike at 66%. Polymarket's odds hit 72%, after Federal Reserve Governor Michael Barr said decisive measures would be taken if inflation failed to ease. At the time, the analysis pointed out that $75,000 was an important support area for Bitcoin, while $82,000 to $86,000 was a resistance level. Bitcoin rose 25% in August, while U.S. spot bitcoin exchange-traded funds (ETFs) attracted $3.52 billion in inflows in 16 of 21 trading days.

If the Fed raises borrowing costs, U.S. investors will now face competition between crypto-assets and rising U.S. Treasury yields. Higher interest rates increase returns on government debt and money market products, which could affect demand for assets without fixed income.

Oil supply risks keep inflation concerns high

Given that gasoline drove more than one-third of the monthly CPI increase in August, energy prices remain a key concern for the Fed. Conflict in the Middle East has disrupted oil flows and heightened concerns that fuel costs could keep overall inflation above central bank targets.

Brent crude remained above $100 despite a nearly 4% drop in oil prices on Friday. According to Folha, benchmark oil prices fell back to around $104 after approaching $110 during the session.

The decline follows reports of possible meetings between Iran and Gulf states, but shipping risks remain as Iranian-backed Houthi forces occupy Palin Island in the Mandeb Strait. The island is located on the main route for oil and commercial transportation between the Red Sea and the Arabian Gulf.

A day earlier, the European Central Bank raised its deposit rate by 25 basis points to 2.5%. The ECB attributed the decision to continued inflation, including pressure from energy prices and the Middle East conflict, and expected eurozone inflation to be above its 2% target for some time.

The International Energy Agency (IEA) said on Friday that attacks on tankers and facilities have caused supply disruptions, while Saudi Arabia's production has dropped to 6 million barrels a day. The agency estimates that global oil supply will be reduced by 5.7 million barrels per day by 2026.