Reasons for today's bullish sentiment on BTC

Key points: 

• After last week's strong rally in the stock market, a cooling DXY and positive inflation data in the CPI can support BTC's higher end of the $18,000 range.
• The Federal Open Market Committee begins meetings on January 31st with a decision on interest rates expected the following day. 
• Investors' confidence in the crypto market may also be increasing because they believe that the Federal Reserve will have smaller interest rate increases throughout 2023 because of the CPI report, which indicates that the Fed's strategy is effective.
• Another positive for Bitcoin's price is the declining DXY. Historically, when the DXY declines, the sentiment for riskier assets like Bitcoin increases.

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The Bitcoin price increased on Jan. 12, and a swift market-wide increase in crypto prices has some investors hopeful that the year-to-date high of $18,898 is a sign that has bottomed. 

After last week's strong rally in the stock market, a cooling dollar index (DXY) and positive inflation data in the Consumer Price Index Report (CPI) can support BTC's higher end of the $18,000 range.

Daily cryptocurrency market performance. Source - Coin360

A primary cause of the increase appears to be the positive CPI report released by the Bureau of Labor Statistics (BLS) that showed overall inflation for all urban consumers decreasing by 0.1%. 

The decline in inflation was the largest since April 2020. Investors are also participating by increasing prices on the expectation that the positive data will lead to less aggressive Fed rate increases at the FOMC meeting on February 1st.

CPI Report. Source - Bureau of Labor Statistics

The stock market began the day on Jan. 12 with a positive trend, the Dow Jones, S&P 500, and Nasdaq all had increased. The price of Bitcoin is closely associated with the performance of U.S. stocks today, and today's increase is no exception to this trend. 

Here are a few of the reasons why the price of Bitcoin is increasing today.

After short liquidation, BTC open interest turned in favor of longs

As Bitcoin's price increased to a yearly high of $18,898 on January 12th, some analysts now believe $18,000 to be the new BTC price ceiling. Despite the fact that BTC trading volume has not returned to pre-FTX levels, the $41.9 billion in Bitcoin transactions posted on January 12 also sets a new yearly high.

The CPI report indicated that inflation decreased for the sixth consecutive month. One of the largest decreases was the significant decrease in gasoline prices. The average price of used and new vehicles also decreased. The caveat in the CPI report is that the cost of services and food remained high.

If inflation has reached its maximum, the Federal Reserve may choose to slow down its interest rate increases. Many traders believe that if the Federal Reserve were to alter its current monetary policy of quantitative tightening and increases in interest rates, BTC's price could increase.

The Federal Open Market Committee begins meetings on January 31st with a decision on interest rates expected the following day. The positive inflation data may influence the FOMC's decision and increase BTC and stock prices. Investors are anticipating the US bank's Q4 2022 earnings report, which is scheduled to take place on January 13th, for additional information regarding the potential Fed decision.

Longer-term, Bitcoin has a positive sentiment, according to market analysts

Investors' confidence in the crypto market may also be increasing because they believe that the Federal Reserve will have smaller interest rate increases throughout 2023 because of the CPI report, which indicates that the Fed's strategy is effective.

The possibility of a policy change is still present and dependent on inflation:

“The Committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time. In determining the pace of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.”

According to CME Group, a derivatives marketplace that has a global benchmark product that estimates interest rates, the probability of a decrease being greater than anticipated is high. 

Interest rates may fall. Source - CME Group

The graph illustrates a possible decrease in the rate of interest increases. The general public's opinion is that future rates may be lowered, which has led investors to believe that there is a chance for a broad crypto market recovery.

The depreciation of the US dollar is beneficial to Bitcoin

Another positive for Bitcoin's price is the declining dollar index (DXY). Historically, when the DXY declines, the sentiment for riskier assets like Bitcoin increases.

U.S. dollar index. Source - TradingView

The S&P 500, Dow, and Nasdaq are considered to be a general overview of the economy. Currently, Bitcoin and the major stock indexes have a high correlation.

Bitcoin, Dow Jones, Nasdaq, and S&P 500. Source - TradingView

If interest rates decline and the economy expands, Bitcoin's value could increase alongside positive stock markets. The more favorable macro conditions, the more beneficial it is for the price of Bitcoin.

Bitcoin's price is showing signs of positive momentum in the short term after positive CPI data, however, the larger issues of centralized exchange insolvencies, looming crypto legislation, concerns over Binance's reserves, and the potential for contagion from Digital Currency Group's legal issues could negatively impact BTC's current rally.