Inflation easing activates the bond market, the US dollar is under pressure, but the $454 million outflow from crypto funds indicates what

Weakening Inflation Data, Market Shows Contradictory Fluctuations

The US December core inflation rate unexpectedly slowed to 2.6%, below the market expectation of 2.7%. This seemingly “good news” data triggered a sharp reaction in the bond market and the dollar: US Treasury yields plummeted, the dollar was sold off, and gold even hit a record high of $4,600. Interestingly, the cryptocurrency market saw outflows of $454 million last week, nearly offsetting all net inflows at the beginning of the year. What is behind this counterintuitive fluctuation?

The True Meaning of Inflation Data

Relief or Trap?

The December core inflation reading of 2.6% indeed fell short of expectations, but this data needs to be understood in a broader context. According to relevant information, the market generally expects this rebound to have “restorative” characteristics, mainly due to statistical adjustments after the Labor Department’s survey returned to normal. In other words, this data does not necessarily indicate a structural improvement in inflation, just statistical volatility.

More importantly, this data is unlikely to change expectations that the Federal Reserve will keep interest rates unchanged later this month. The Fed’s policy path remains highly uncertain: according to Fed futures markets, the first rate cut could occur in March, April, or June, but none have more than a 50% probability priced in. This ambiguity itself is a risk.

Market’s “Optimistic” Reaction

The reaction in bonds and the dollar is straightforward: investors rush to buy US government bonds, pushing yields down. The dollar is sold off, with safe-haven assets like gold and the Swiss franc leading gains. These reactions reflect the market’s optimistic expectations that “inflation may ease, and rate cuts could be on the horizon.”

However, this optimism has not been echoed in the crypto market.

“Flight” Signals in the Crypto Market

Scale and Structure of Fund Outflows

Last week’s outflow data from crypto investment funds warrants close examination. According to CoinShares reports:

• Total outflow: $454 million
• Outflows from the US market: $569 million (largest)
• Bitcoin products outflow: $405 million
• Ethereum products outflow: $116 million
• Small inflows in Germany, Canada, Switzerland, and other regions

This indicates that outflows are mainly concentrated in mainstream cryptocurrencies in the US market, rather than a global panic.

The Real Reasons for Outflows

On the surface, weakening inflation data should be positive for risk assets. But the significant outflows from crypto funds reflect a deeper concern: the diminished expectation of rate cuts by the Fed.

According to CME’s FedWatch tool, the market’s expectation for a rate cut in March is only 5%. This is a significant decline from a few weeks ago. Goldman Sachs has even delayed its rate cut expectations, now predicting the first cut will not occur until June, rather than the previously expected March or June.

In other words, although the inflation data has softened, it has not strengthened expectations for rate cuts in the near term. Instead, it highlights that even if inflation eases, the Fed is unlikely to rush into cutting rates.

Why Does Weakening Inflation Become Negative for Crypto?

The Breakdown of Liquidity Expectations

Crypto markets are highly sensitive to liquidity. The previous logic was: worsening inflation → Fed forced to hike rates → market realizes rate hikes are excessive → Fed quickly cuts rates → liquidity loosens → crypto assets benefit.

But now, the data breaks this chain. Although inflation has eased, the Fed remains cautious, with rate cut timing repeatedly pushed back. This means the timetable for liquidity easing has been significantly delayed.

Rising Policy Uncertainty

In addition to inflation data, the crypto market faces other uncertainties. Political pressure from the Trump administration on the Fed (including criminal investigations into Powell) has heightened market concerns. This political intervention risk is priced into the market as an additional volatility premium.

Key Risks This Week

According to reports, the US will release January CPI data (January 13, 21:30), which will be a key short-term risk event. Market expectations:

• Overall CPI year-over-year: slightly up from 3.0% to 3.1%
• Core CPI year-over-year: steady at 3.0%

If the data significantly exceeds expectations (especially core CPI), concerns about inflation stickiness will rise, potentially further suppressing risk appetite. Conversely, if the data drops sharply or aligns with weak employment figures, it could reinforce easing expectations and benefit risk assets.

Summary

Weakening inflation data should have been positive for risk assets, but the $454 million outflow from crypto funds indicates a key issue: market expectations for Fed rate cuts have not been strengthened; instead, there is disappointment over the delay in liquidity easing. This is not a problem with the inflation data itself, but a re-pricing of the Fed’s policy path.

In the short term, the core risk for crypto markets is that even if inflation continues to ease, the Fed may remain on hold, delaying liquidity easing further into the future. This week’s CPI data, Fed officials’ speeches, and ongoing political pressure from the Trump administration on the Fed will be critical triggers for market re-pricing.