Bitcoin's correlation with the stock market has been on the rise since it became a mainstream asset, making it more susceptible to global events. This was reflected in its reaction to rising inflation and the continuous interest rate hikes by the Fed. However, this trend seems to be reversing as inflation gradually decreases. This could potentially lead to a change in the Fed's stance on interest rates which begs the question, what does this mean for Bitcoin?
In a report released on Tuesday, Markus Thielen, research head at Matrixport, outlines a bullish case for Bitcoin in light of decreasing inflation. He first explains that the expectation is for inflation to continue to decrease, which would be good news for risk assets like BTC. Matrixport's inflation forecast for 2023 predicts a decrease of over 50% to below 2% before year-end. Such low CPIs would undoubtedly result in the Fed reversing its stance on interest rates, with the report predicting interest rate cuts of up to 100 basis points.
The report states that "hedge funds are massively hedged in equities. CFTC data for S&P500 positions are at levels only seen during the 2008 financial crisis and the European debt crisis of 2011." However, this does not necessarily mean that Hedge funds are short, but it does indicate that these contracts have been sold and will need to be covered at some point. This buying will push prices up.
If inflation were to fall as low as predicted, the price of BTC could rise towards the $40,000 mark before the end of 2023. Regarding the current Bitcoin price and how to play the market, the report adds that "a stop-loss of $27,000 (-3%) could offer significant risk/reward as macro data is soon to be released", referring to the CPI data released on Wednesday, June 10.
With less than a day left until the release of the May CPI data, Bitcoin sellers are currently holding the market hostage. As a result, the digital asset has fallen to the mid-$27,000 range, where it currently trends. This is also understandable as investors tend to move their holdings into stalls before significant events like this in anticipation of high market volatility.
This price drop has driven BTC below its simple moving average (SMA) of 20 days and brings it dangerously close to its 50-day moving average. If the digital asset were to fall below the latter, this could be catastrophic as it would solidify the bears' grip on the market and further drive the price down.
Another downward movement from here could see BTC drop to $26,000, where the next significant support level lies. Therefore, it is essential that the CPI data comes out with a lower inflation rate and that the Fed shifts from restrictive to dovish. Otherwise, risk assets like BTC and the entire cryptocurrency market could experience a rapid decline.
