XRP, Bitcoin Could React to Inflation Data

What to Know:

• Core PCE data is anticipated to show inflation remaining above the Fed’s target, yet volatility indices remain calm, suggesting a disconnect in market expectations.
• Anticipated Fed rate cuts are likely contributing to the subdued volatility, overshadowing inflation concerns.
• A softer-than-expected PCE report could trigger a rally in Bitcoin and other cryptocurrencies, while stronger data might keep markets range-bound.

The upcoming release of the core Personal Consumption Expenditures (PCE) data, the Federal Reserve’s preferred inflation gauge, is poised to reveal whether inflation is truly cooling down or remains stubbornly persistent. Despite expectations that the core PCE likely rose in September, moving away from the Fed’s desired 2% annual rate, volatility in the crypto market remains surprisingly low. This divergence raises questions about market sentiment and the factors influencing investor behavior in the face of macroeconomic uncertainty.

Decoding the PCE Data and Fed’s Dilemma

The anticipated core PCE figure of 2.9% year-on-year would mark over four years of inflation exceeding the Fed’s target, potentially emboldening those within the central bank who advocate for a more cautious approach to interest rate cuts. Persistently high inflation could limit the Fed’s flexibility and delay any potential easing of monetary policy. However, the market appears to be pricing in rate cuts regardless of the PCE data, suggesting a belief that the Fed will prioritize economic growth over taming inflation completely. This expectation is reflected in the CME’s FedWatch tool, which currently indicates a high probability of a 25 basis point rate cut in December. The interplay between inflation data and the Fed’s response is crucial for understanding the broader economic landscape and its impact on risk assets like cryptocurrencies.

Bitcoin’s Volatility and Market Expectations

Despite the potential for a market-moving inflation report, Bitcoin’s implied volatility remains subdued. Volmex’s annualized one-day bitcoin implied volatility index (BVIV) is currently hovering around 36%, which translates to an expected 24-hour price swing of just 1.88%. This suggests that traders are not anticipating any major turbulence in the Bitcoin market, even with the PCE data looming. Several factors could be contributing to this low volatility. As mentioned, the expectation of Fed rate cuts is a primary driver, as lower interest rates tend to boost risk appetite and asset prices. Additionally, the increasing institutional adoption of Bitcoin, particularly with the potential approval of spot Bitcoin ETFs, may be dampening volatility as long-term investors enter the market.

Altcoins and the Ripple Effect of PCE Data

The impact of the PCE data extends beyond Bitcoin, with alternative cryptocurrencies also poised to react to the report. Ether’s one-day implied volatility index is slightly higher than Bitcoin’s, suggesting a potentially larger price swing. Similarly, Solana (SOL) and XRP exhibit even higher volatility expectations, indicating that these altcoins could experience more pronounced price movements in response to the PCE data. A softer-than-expected PCE report could fuel a broader crypto rally, as investors seek higher-yielding assets in a lower-interest-rate environment. Conversely, a stronger-than-expected report could lead to a pullback, particularly in altcoins that are more sensitive to risk sentiment. The performance of XRP, in particular, will be closely watched given Ripple’s ongoing legal battles and its significance in the payments space.

Institutional Positioning and Market Structure

The market’s reaction to the PCE data will also depend on the positioning of institutional investors. If institutions are already heavily invested in Bitcoin and other cryptocurrencies, a positive surprise in the data may have a limited impact on prices. However, if institutions are underweight crypto, a softer-than-expected PCE report could trigger a wave of buying, driving prices higher. The market structure also plays a role, with liquidity and order book depth influencing the magnitude of price swings. Thinly traded altcoins are likely to experience greater volatility than Bitcoin, as even relatively small trading volumes can have a significant impact on prices. The potential approval of spot Bitcoin ETFs could further alter the market structure, attracting new institutional capital and potentially reducing volatility over the long term.

“A softer labor read and contained PCE would reinforce the easing narrative supporting crypto’s rebound, while any upside surprise may keep markets range-bound until the Fed clarifies its path,” Iliya Kalchev, Nexo Dispatch analyst, said in an email.

In conclusion, the upcoming PCE data release represents a key event for the cryptocurrency market. While low volatility suggests that traders are anticipating a dovish outcome from the Federal Reserve, the actual data could still trigger significant price movements, particularly in altcoins. Investors should closely monitor the PCE data and the Fed’s subsequent response to gauge the potential impact on their cryptocurrency holdings.

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Source: Original article