Bitcoin Gains Steam as Fed Rate Cut Odds Rise and ETFs Draw $360M Inflow

Cryptocurrencies have shown renewed strength in recent trading sessions, buoyed by improving market sentiment and expectations for an aggressive shift in U.S. monetary policy. Bitcoin (BTC), the largest cryptocurrency by market capitalization, extended its recovery above $112,500, marking a three-day upward trend. This movement aligns with broader risk-on sentiment, as macroeconomic developments, including recent U.S. labor data and a softening in producer price inflation, suggest a potential September rate cut by the Federal Reserve. Institutional activity has also played a role, with U.S. Bitcoin spot Exchange-Traded Funds (ETFs) recording an inflow of over $360 million on Monday, signaling increased confidence among investors.

The recent price action in Bitcoin reflects a broader shift in market dynamics. According to data from Coinglass, the long-to-short ratio for BTC reached 1.05 on Tuesday, the highest in over a month, underscoring the growing optimism among traders. This is further supported by the Relative Strength Index (RSI) moving above the 50 threshold, indicating the early signs of bullish momentum. Additionally, a bullish crossover in the Moving Average Convergence Divergence (MACD) indicator on Saturday provided further technical confirmation for a potential continuation of the upward trend. However, traders remain cautious, as the market is still consolidating above the short-term holder cost basis of around $111,000, with lighter trading volumes and defensive positioning in the options market pointing to uncertainty.

The U.S. Producer Price Index (PPI) data for August showed signs of easing inflationary pressures, with the annual rate falling to 2.6% from 3.3% in July, below market expectations. On a monthly basis, the PPI declined by 0.1% following a 0.7% increase in July. These figures, alongside a preliminary estimate of a significant downward revision in Nonfarm Payrolls for March 2025, reinforce the narrative of a cooling labor market and reduced inflationary pressure. The core PPI, which excludes volatile food and energy prices, also softened, rising 2.8% year-on-year after a 3.7% increase in July. This data has weighed on the U.S. Dollar (USD), with the USD Index dropping 0.1% at the time of the report, as traders recalibrated their expectations for Fed policy.

The weakening U.S. Dollar has had a positive impact on cryptocurrencies, which are often viewed as alternative assets that perform well in environments of accommodative monetary policy. The USD's bearish pressure, as reflected in its weaker performance against major currencies such as the Australian and Canadian Dollars, aligns with the broader narrative of a dovish shift in Fed policy. The market has already priced in a rate cut at the upcoming Federal Open Market Committee (FOMC) meeting, with the CME FedWatch Tool indicating an 88.2% probability of a 25 basis points (bps) reduction and an 11.8% chance of a 50 bps cut. The outcome of the upcoming Consumer Price Index (CPI) data on Thursday will likely provide further clarity on the Fed’s path forward, but the current trajectory remains favorable for risk assets such as Bitcoin.

Looking ahead, the cryptocurrency market will closely monitor the Fed's policy direction and institutional flows into Bitcoin ETFs. If the bullish momentum continues and the ETF inflows remain robust, Bitcoin could test the $116,000 level, with further upside dependent on the broader macroeconomic environment. Analysts note that while the near-term outlook appears constructive, volatility remains a key risk, particularly in the options market where defensive positioning and elevated demand for downside protection persist. Traders and investors should therefore remain cautious while watching for signs of a potential correction, with key support levels around $107,245 to be closely monitored.