US inflation outlook underpins Bitcoin bulls after best week since March

The crypto market has stabilized, with Bitcoin rising nearly 7% in the week ended July 5, its best performance since March.

The impetus comes from inflation breakevens, which measure the market's expectations of future price increases by comparing regular government bonds to inflation-protected ones. The two-year breakeven has dropped below 2% (check the Daily Signal), which is the Fed's target for inflation. The longer-term breakevens have also dropped sharply in recent weeks.

Notably, both the two-year breakeven rate and WTI oil prices, which influence inflation, have slipped to levels last seen before the onset of the Iran war in late February.

This is leading some observers to question inflation concerns, Fed interest-rate-hike bets and the dollar's strength. Bullish positioning is lopsided and vulnerable to sudden unwinding that could put the Dollar Index (DXY) under pressure. Such a snap adjustment could happen on July 14, when the U.S. reports the consumer price index for June.

"That’s when the deflationary impulse from falling oil prices should remind everyone that the Fed isn’t going to hike and that - if anything - the next move will be a cut," Robin Brooks, a senior fellow at the Brookings Institution and former chief economist at the Institute of International Finance, said in a report.

If the currency's strength is under question, then the barrier to Bitcoin rising further also looks weaker. The two are known to be inversely correlated.

Some observers, however, are calling for caution, saying the market is overestimating the impact of oil prices on inflation. Elevated price pressures, they say, are now a structural issue.

"The Fed can't declare victory simply because gasoline prices move lower. Sticky service-sector inflation is exactly why policymakers are likely to keep rates higher for longer, even if headline CPI continues moderating," YCC Macro said on X.

Markets betting on aggressive easing may be underestimating how persistent underlying inflation really is," YCC Macro added. Stay alert!