TA Tuesday: Rising inflation might lead to another EU crisis

At the time of writing, $BTC is trading at $20,764 (+1.03% in 7 days), $ETH is trading at $1,188 (+5.33% in 7 days), and so the ETH/BTC spread is trading at 0.05716 (+4.27% in 7 days), and $SOL is trading at $37.93 (+7.75% in 7 days).

On the macro side:
While major central banks have stated that inflation is neither accidental nor temporary, neither the Fed nor the ECB are seriously fighting it.

1. The Fed’s Balance Sheet is 37% of US GDP and has been unchanged since February
2. The ECB’s Balance Sheet is 82% of EU GDP and has actually been increasing since February
3. The SNB’s Balance Sheet is 135% of Swiss GDP and has been declining slightly since February
4. The BoJ’s Balance Sheet is 148% of Japan’s GDP and has been on the rise since February

Instead of the Fed’s “quantitative tightening”, we should be talking about “quantitative stasis” as Lisa Abramowitz said. The ECB appears willing to pursue a neutral interest rate monetary strategy to maximise GDP and keep inflation stable.

I do not believe that European inflation is solely due to the shortage of supplies and the Russia-Ukraine conflict. We could, therefore, see another EU crisis to keep countries with completely different economies and economic needs under the same monetary policy.

Market participants still seem to believe that inflation will fall relatively quickly, and that central bankers should and will play an active and generous role in this. And this explains why interest rates on bonds remain quite low, i.e. the US yield curve continues to be flat on the backend.

However, we are already seeing that EU countries have a slightly different spread, with Germany on the 10-year yield despite the ratings. Here is an example:

1. IT10Y – DE10Y: 204.8 bps (+72bps YTD, +53.27%)
2. FR10Y – DE10Y: 52.2 bps (+25bps YTD, +107.4%)
3. NL10Y – NL10Y: 31.1 bps (+21.6bps YTD, +227%)

The Fed is likely to keep real interest rates negative, and I still expect a higher curve towards the fourth quarter.

In terms of the EU, it will be difficult for the ECB to protect the sustainability of public debt regardless of bond buying programmes that will simply postpone and increase the problem.

This week the market will mainly focus on US core PCE numbers for May, which are due out on Thursday (forecast: 4.8% YoY). If inflation has peaked, risky assets are likely to rise to the upside and vice versa.

On the crypto side:
As a result of the large liquidation and the demand to use BTC as collateral, alts outperformed BTC.

Since there is no clear catalyst influencing cryptocurrencies, they are likely to continue trading in tight spreads in a low volatility environment.

Looking at the VPVR:
BTC Resistance: $30k
BTC Support: $15k – $20k

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