While Bitcoin Might See Benefits from a Mild U.S. CPI Report, A Strong Risk-On Rally in BTC Remains Unlikely.

A soft U.S. inflation report set to be released later today is expected to favor risk assets, including bitcoin (BTC). However, those hoping for a sharp upward move in prices may be left disappointed.

The U.S. Labor Department is scheduled to release the January consumer price index (CPI) report at 13:30 UTC. Analysts predict a 0.3% month-on-month increase in the cost of living, which would be a slight slowdown from December’s 0.4% rise, as per Reuters and FXStreet estimates. The annual CPI is expected to hold steady at 2.9%, matching the previous month’s reading.

Core inflation, which excludes food and energy costs, is forecast to rise by 0.3% month-on-month, slightly up from December’s 0.2%. This would bring the annualized figure down to 3.1%, slightly lower than the previous month’s 3.2%.

If the data comes in below expectations, particularly in the core inflation figure, it could raise hopes of more Federal Reserve (Fed) rate cuts, potentially leading to lower Treasury yields and a weaker dollar. This, in turn, could increase demand for riskier assets such as bitcoin. According to CME’s FedWatch tool, the market currently assigns a 54% probability that the Fed will either reduce rates or leave them unchanged this year.

While this could provide a boost for BTC, it’s unlikely to spark a significant breakout from the current price range of $90,000 to $110,000.

Forward-looking indicators suggest that inflationary pressures could pick up again in the coming months, particularly as concerns about trade wars continue. This could limit the Fed’s capacity to make substantial rate cuts. Mott Capital Management’s data shows that two-year inflation swaps have risen to nearly 2.8%, the highest since early 2023, indicating that market participants expect inflation to rise.

Many investment banks believe that a mild CPI reading for January won’t alter the Fed’s hawkish approach. In his testimony before Congress, Chairman Jerome Powell reiterated that the Fed is not in a hurry to reduce rates.

RBC’s weekly report stated that while inflationary pressures might ease somewhat, it won’t be enough to prompt the Fed to cut rates. BlackRock also noted that persistent inflation in services will likely keep the Fed from loosening policy anytime soon.

If the CPI report comes in stronger than expected, bitcoin may struggle to break out of its current trading range and could move closer to the lower end of the $90,000 to $110,000 range.