Robert Steinadler, 3 months ago

US Inflation increased in August – Why is the crypto market tanking?

US consumer price inflation went higher than expected in August. This has a huge impact on the market and prices are tanking. Why is this so important, and what will drive investors’ expectations in the month to come?

Inflation up, the market goes down

The market is driven by the expectation that Fed could possibly change its course and stop raising interest rates. One possible indicator of a change is the success of the Feds measures fighting inflation so far.

When CPI data for July showed that inflation was decreasing most market participants had high hopes that this could hint at a turning point for the next FOMC meeting on September 22. But just a few minutes ago the CPI for August was released by the US Bureau of Labor Statistics and it went above expectations.

With 8,3 % CPI, the US inflation has increased compared to last year and exceeded expectations by 0,2 % for this month.

FOMC meeting could crash the market further

The upside is that inflation increased only slightly. Still, the next FOMC meeting will most likely determine how the Fed is going to handle the situation for the rest of this year. Without a huge success at hand, it is only likely that Jerome Powell will hold yet another speech sweet-talking the fact that further rate hikes are needed.

The downside is that markets will most likely suffer in the long run from this policy. The Fed has no other tools to fight inflation and currently, it is the most important task to do so without hurting the market too much. A softish landing was promised several times and it is not unlikely that the Fed will continue with the current pace.

The crypto market is perceived as driven by so-called risk-on assets. This means that they offer a lot of opportunities, but the outcome of investing in these assets is very uncertain. Professional investors tend to avoid riskier asset classes and try to stick to either cash or more conservative investments trying to protect their wealth. Data shows that there is still a lot of capital in stablecoins waiting on the sideline. This indicates that most crypto-native investors are still waiting for the right time to buy back in and increase their positions. With the US CPI increasing in August we are most likely to witness more volatility this month. BTC already reacted and lost around $1.300 in price within minutes after CPI data was released.

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