Bitcoin Drops 2% on Hotter-Than-Expected U.S. Inflation

• Bitcoin dropped to $48,800 as the January Consumer Price Index report showed 3.1% annual inflation, higher than analyst forecasts.

• Expectations of a rate cut in May fell to 34% from 52%, CME FedWatch Tool shows.

• "Nasty" inflation was short-term damaging, but won't "dampen the mood" in crypto markets, OANDA's Craig Erlam said.

Bitcoin {{BTC}} fell below $49,000 Tuesday after a hotter-than-anticipated U.S. inflation reading weighed on interest-rate cut expectations.

The largest crypto by market capitalization slipped about 2% to $48,700 from slightly above $50,000 earlier in the day, while the broad-market crypto index CoinDesk 20 (CD20) lost 2.4%.

Later in the day, cryptocurrencies pared some of the declines with BTC recovering to $49,100, but most of the CD20 constituents were still down 2%-3% over the past 24 hours. Solana's native token {{SOL}} held up better, gaining over 1% during the same time, while BTC was down 1.5%.

U.S.-listed cryptocurrency-focused stocks tanked when markets opened, but has recovered part of their losses later in the afternoon. Shares of Coinbase (COIN) and MicroStrategy were down roughly 3% from Monday's closing price, while large BTC miners Marathon (MARA) and Riot Platforms (RIOT) 5% and 2%, respectively.

The drop in prices happened after the January Consumer Price Index (CPI) report showed 3.1% year-on-year inflation, faster than analysts' 2.9% forecast. Market participants now see only a 34% chance of the Federal Reserve cutting interest rates in May, down from 52% a day ago, according to the CME FedWatch Tool.

The lower chance of imminent rate cuts weighed on traditional markets as well. The 10-year U.S. Treasury bond yield advanced 12 basis points, while the S&P 500 equity gauge and the tech-heavy Nasdaq Composite Index declined as much as 2%.

"This is not the inflation report that the Federal Reserve wanted to see and markets have responded accordingly," Craig Erlam, senior analyst at online brokerage platform OANDA, said in a Tuesday note.

He pointed out that traders now price in only three rate cuts (75 basis point) for 2024, a significant drop from 175 basis points at some point last month, but suggests that fears about inflation might have swung overly pessimistic.

"While markets appeared to be positioned too optimistically last month, I wonder whether the pendulum has now swung too far in the other direction," Erlam said. "We have still seen substantial progress on inflation and I expect we'll see more over the coming months."

Erlam noted that the "nasty" inflation reading came at an unfortunate time for bitcoin and "rug-pulled" its rally just when it broke above the $50,000 level on Monday for the first time since December 2021.

"While damaging in the short run, I don't think it will dampen the mood in the crypto space too much," he added.

UPDATE (Feb. 13, 19:33 UTC): Updates price action. Adds analyst comment.