Rate Cuts Boost Bitcoin

Global central banks are increasingly cutting interest rates, a trend that bodes well for risk assets like cryptocurrencies. Bitcoin (BTC) experienced its largest single-day gain in nearly two months on Wednesday, spurred by weak U.S. economic data, which increased the likelihood of the Federal Reserve (Fed) reducing rates in line with other advanced economies during the summer.

Bitcoin surged over 7.5% to $66,250, marking the largest percentage increase since March 20, according to TradingView and CoinDesk. This rise highlights BTC’s sensitivity to anticipated changes in major central banks’ monetary policies, as lower borrowing costs for fiat currencies tend to boost risk assets.

The U.S. Labor Department’s recent data revealed a lower-than-expected increase in the consumer price index (CPI) for April, suggesting a decline in the cost of living. The CPI rose 0.3% in April, down from 0.4% in March and February. The core CPI, excluding food and energy, also saw a 0.3% rise in April, down from 0.4% in March. Additionally, April’s retail sales growth stagnated, with a 0.3% month-on-month decline in the “control group” category, which is significant for GDP calculations.

These economic indicators have shifted rate-cut expectations significantly. Fed funds futures now indicate that traders expect a 25 basis point rate cut by the Fed in September. The Fed has also announced plans to slow down quantitative tightening, a liquidity-reducing measure, starting in June.

The Fed is not alone in this trend. Markets anticipate the Bank of England (BOE) and the European Central Bank (ECB) to cut rates in June. Both the Swiss National Bank (SNB) and Sweden’s Riksbank have already lowered their benchmark rates. Globally, central banks are moving towards monetary or liquidity easing, which supports risk assets, including cryptocurrencies. Data from MacroMicro shows that the percentage of global central banks that recently raised rates is declining, while those cutting rates are increasing.MacroMicro explains that a higher proportion of central banks cutting rates enhances market liquidity, while a lower proportion reduces it. This shift towards liquidity easing is expected to support equities and give investors more confidence to engage in riskier assets, as noted by the broking firm Pepperstone.

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