Bitcoin and Ether prices experienced a sharp decline on Wednesday, reversing gains made earlier this week. Bitcoin dropped 5% to $96,527 after briefly surpassing the $100,000 mark, while Ether tumbled 8.5% to $3,353. Other major cryptocurrencies, including Dogecoin and Avalanche, also faced double-digit losses. The Block’s GMCI 30 index, which tracks the top 30 cryptocurrencies, fell 7.48%.

Macroeconomic Pressures Weigh on Markets

The downturn in the crypto market coincided with broader financial market declines. Min Jung, an analyst at Presto Research, attributed the sell-off to rising concerns about persistent inflation, as recent ISM data revealed faster-than-expected U.S. economic growth. This has heightened fears that inflation may remain elevated, pushing bond yields to new highs.

“Not just crypto, but both the NASDAQ and S&P 500 fell more than 1% yesterday,” said Jung. “This was driven by inflation worries and a surge in the 10-year Treasury yield, now at its highest since April.”

Federal Reserve Policies Add to Volatility

Recent data has bolstered expectations that the U.S. Federal Reserve will maintain high interest rates for an extended period. Rachael Lucas, a crypto analyst at BTC Markets, explained that traders are bracing for a more hawkish monetary policy.

“The market was already uneasy after Federal Reserve Chair Jerome Powell’s comments in December signalled a firm stance on inflation control,” Lucas said. Powell’s remarks, coupled with new economic data, have dampened hopes for rate cuts, contributing to increased volatility across markets.

CME Group’s FedWatch Tool indicates a 95.2% probability that the Federal Reserve will hold interest rates at 4.25% to 4.5% during its Jan. 29 meeting.

Political Developments Add Uncertainty

Donald Trump’s upcoming inauguration on Jan. 20 is injecting further uncertainty into the markets. Optimism earlier this week, fuelled by pro-crypto sentiment surrounding Trump’s administration, quickly gave way to caution as traders assessed potential policy impacts.

“With a pro-crypto majority in Congress and appointments like Scott Bessent as Treasury Secretary and Elon Musk as an advisor, the administration signals a significant pivot towards cryptocurrency,” said Lucas.

However, Trump’s vow to impose heavy tariffs has raised concerns about exacerbating inflation, complicating the economic outlook further.

Key Data Releases to Watch

Investors are closely monitoring upcoming economic events, including the release of FOMC minutes and non-farm payroll data later this week. The release of the Consumer Price Index (CPI) on Jan. 15 will be particularly significant in gauging inflation risks and potential shifts in Federal Reserve policy.

As markets navigate a mix of economic pressures and political changes, traders are bracing for continued volatility in the weeks ahead.