Bitcoin reached a three-week high before plummeting after US inflation data was worse than many traders had expected. Other blue-chip cryptocurrencies also fell.
The downturn experienced by the cryptocurrency market on Wednesday was triggered by a renewed expectation that the US Federal Reserve will implement more a restrictive US monetary policy after consumer price index, CPI, inflation data came in hotter than expected.
The US consumer price index rose only 0.1% in August, but the core rate of inflation that omits food and energy prices increased by a sharp 0.6%, double Wall Street's forecast of a 0.3% gain.
On Tuesday, bitcoin (BTC-USD) was trading at a three-week high of $22,652 but fell 9.5% in the past 24 hours to $20,261 as of the time of writing.
Ethereum (ETH-USD) joined bitcoin's voyage south, losing gains made before the inflation data was released.
The world's second-largest cryptocurrency (ETH-USD) fell from $1,745 on Tuesday to $1,609, despite the anticipation for tomorrow's Ethereum 'merge' to a proof of stake method for transaction validation.
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Ethereum investors are hoping that the imminent 'merge' runs smoothly and their digital asset does not take a further hit.
However, co-founder of Ethereum Joseph Lubin reassured the crypto-community on Bloomberg Television and said: “There’s been so much testing that the merge itself is overwhelmingly likely to be very smooth."
Lubin then added that major Ethereum-based services are ready for the upgrade but some smaller ones may need to do more work.
Many analysts are now painting a gloomy macroeconomic outlook after the CPI figures were released.
There is now a broad consensus the Federal Reserve will raise its benchmark interest rate by 0.75 percentage point next week.
Speaking to Market Watch, Ian Shepherdson, chief economist at Pantheon Macroeconomics said: “Federal Reserve officials have made it very clear that they will not slow the pace of rate hikes until they see convincing evidence that core inflation pressure is easing,”
“These data mean that the chance of a 50 basis point rate hike next week has gone."
Some economists even expect the Fed will enact a 100 basis point rate hike as early as this September.
In a note released by economists at Nomura Securities a 100 basis point hike in September is suggested.
Also, speaking to the Wall Street Journal chief economist at KPMG Diane Swonk said the CPI report was a “nightmare” that put a 100 basis point rate rise back on the table.
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