The US Central Bank announced last Wednesday that it will not be long before it implements its first interest rate cut. Naturally, the price of Bitcoin (BTC) and the rest of the financial markets will respond positively to this.
While Bitcoin started the week with a sharp decline, it has almost fully recovered following “positive” news from the US central bank.
As a result of these statements from the US central bank, the market is already placing the chance of a first interest rate cut in January 2024 at 14.5%.
For March-May 2024, the chances of a first rate cut are currently 79.5% and 97.4%. In this regard, it does not look like it will be long before interest rates drop, and this is of course the message the market has been waiting for.
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Why next Friday is important for Bitcoin
Next Friday could be crucial for the price of Bitcoin. Then we will see the new core inflation in US personal consumption expenditures.
This is the US central bank’s preferred measure of inflation and the measure of inflation that the Fed wants to return to 2.0%.
If we extend the declines over the past six months in core PCE inflation out to 12 months, inflation currently looks about the same as above. As you can see, the core PCE rate is already close to the 2.0% target.
This is interesting because Jerome Powell, the head of the US central bank, indicated on Wednesday that interest rates must be lowered even before inflation reaches 2.0%.
Otherwise, there is a possibility that inflation will fall too much or there may be deflation… This is the big fear of every central banker.
So why is deflation so dangerous?
In principle, we might say that deflation is not bad. Lower prices make it easier for people to do their shopping. Purchasing power is increasing and this is a good development for the economy, right?
Unfortunately, this is not the case in the current financial system. The financial system is built on debt and inflation is necessary to make debt less valuable. Let’s say we get a massive downturn in the Netherlands. This can be disastrous for people with a mortgage, who suddenly can no longer pay bills.
In this regard, next Friday promises to be a very important day for the Bitcoin price.
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