May CPI data created satisfaction by exceeding economists’ forecasts on both a monthly and annual basis. While inflation was zero on a monthly basis, it decreased to 3.3% on an annual basis. These results were below April’s monthly inflation rates of 0.3% and annual inflation rates of 3.4%. Core CPI, which measures inflation when food and energy are excluded, was also below expectations. Core CPI increased by 0.2% on a monthly basis and 3.4% on an annual basis in May. These rates fell short of the estimates of 0.3% and 3.5%, respectively.

The flat course of inflation in the USA and the more moderate course of core CPI were welcomed positively in the cryptocurrency markets. Following this news, Bitcoin (BTC) rose by approximately 4% in the last 24 hours, reaching $69,400. This rise can be considered as a recovery in Bitcoin prices, which have recently fallen due to inflation concerns.

Inflation had fallen rapidly in 2022 and 2023 as the Federal Reserve increased interest rates. However, in recent months the inflation rate has continued to remain above policymakers’ 2% target. This situation disrupted market participants’ expectations for a rate cut. Earlier in the year, investors expected five or six 25 basis point rate cuts in 2024 by the end of December. However, after the CPI data announced today, this expectation decreased to one or two interest rate cuts. It is estimated that the first interest rate cut will be postponed until September.

A recent report from K33 Research stated that cryptocurrency prices have recently become “hypersensitive” to US economic data. There are two main reasons for this situation:

First, cryptocurrencies are considered assets that carry high risk as well as high return potential. Therefore, investors are as sensitive to macroeconomic indicators such as inflation and interest rates as traditional investors. High inflation and interest rate increases cause investors to move away from cryptocurrencies and look for safer havens.

Secondly, expansionary monetary policies that started in 2020 and accelerated during the pandemic period paved the way for a significant rally in crypto markets. The high liquidity introduced into the market has increased the flow towards cryptocurrencies. Therefore, investors see the decrease in inflation and the arrival of interest rate cuts as a positive development in the sense that new liquidity will enter the market and crypto prices will rise.

The US Federal Reserve’s (FED) future interest rate decisions and inflation outlook will significantly affect the course of crypto markets in the coming period. The “dot chart,” expected to be published by the Fed today, will include interest rate forecasts and signal markets about policymakers’ next steps.

Developments outside the USA are also an element that should be followed closely for cryptocurrency markets. Some important central banks, such as the European Central Bank and the Bank of Canada, have started to reduce interest rates. This situation may be indirectly reflected in cryptocurrency prices by affecting the global liquidity environment.