Here’s why the rising US inflation matters

Ethereum price has bounced back in the past two days.

Franklin Resources became the other company to file for a Bitcoin ETF.

US published strong consumer inflation numbers.

Ethereum price rose for the second straight day even after the US published strong consumer price index (CPI) data. The price jumped to a high of $1,595, a few points above this week’s low of $1,530. In all, the coin has dropped by more than 25% from the highest level this year.

Bitcoin ETF applications

Ethereum price bounced back after Franklin Templeton became the first big financial services company to file for a spot Bitcoin ETF. The other major Wall Street firms that have done that are Blackrock, Invesco, Ark Invest, and Fidelity.

Analysts believe that these companies have a higher chance of gaining the approval of launching these funds. For one, these companies have put in place strict surveillance clauses to prevent market manipulation.

Most importantly, the Securities and Exchange Commission (SEC) will likely want to avoid another embarrassing court case. Two weeks ago, the regulator suffered a big blow when Grayscale won a major lawsuit in the US.

A Bitcoin ETF is seen as a positive thing for Ethereum, the second-biggest cryptocurrency in the world. For one, if the SEC approves the fund, these companies will come back with an ETF that tracks Ethereum.

This explains why the discount of Grayscale’s Ethereum Trust (ETHE) to NAV has narrowed recently. Ark Invest, the company owned by Cathie Wood, has also already applied for an Ethereum ETF.

US inflation data

Meanwhile, Ethereum price jumped even after the strong US inflation data. According to the statistics agency, the headline inflation jumped to 3.7% in August, the biggest increase in months. Core inflation, which excludes the volatile products fell to 4.3%.

These numbers have an implication for Ethereum and other cryptocurrencies. First, the data mean that the Federal Reserve could deliver another 0.25% interest rate hike next week. In most periods, Ethereum tends to underperform when the Fed is hiking interest rate. Before the inflation numbers, most analysts were expecting the Fed to pause its hikes.

Second, higher inflation rates will lead to better cash returns. Recent data shows that money market funds are yielding over 5.5%. Therefore, we could see an increased move from Ethereum to cash. 

Most importantly, cash is now yielding higher than most Ethereum DeFi products like Aave, Compound, and Maker. As a result, the total value locked (TVL) in Ethereum’s DeFi protocol has dropped by 11% in the past 30 days to $55 billion.

Therefore, I suspect that Ethereum price will likely resume the bearish trend in the coming weeks.

How to buy Ethereum