Why Bitcoin may be boosted by a European Central Bank rate cut

Bitcoin inflows could see an increase this week following a key monetary policy decision in the European Union.

The European Central Bank (ECB) is expected to cut interest rates by 0.25% to 4.25% on June 6. The rate cut could boost investor appetite for risk assets such as Bitcoin (BTC), according to Jag Kooner, the head of derivatives at Bitfinex. Kooner told Cointelegraph:

“The European Central Bank is expected to cut interest rates next week to stimulate economic growth. Lower rates typically weaken the euro and increase liquidity, which can boost risk assets, including Bitcoin.”

The rate cut expectations come during a period of slowing inflation in Europe. May’s headline Consumer Price Index (CPI) is expected to come in at 2.6% — potentially marking the eighth consecutive month of inflation below the 3% mark.

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Bullish outlook: Bitcoin will follow equities higher

The potential interest rate cut could boost traditional equity markets and add more upward momentum for Bitcoin, according to James Wo, the founder and CEO of DFG.

Wo told Cointelegraph:

“Cutting of interest rates will impact traditional equities positively, as seen from how European stocks rose after dovish comments from the ECB Governing Council earlier in May. This might translate to a shift in liquidity to more risk-on assets such as Bitcoin as well, boosting its price.”

Two of Europe’s flagship stock indexes, the STOXX 600 and DAX 40 rose during May, along with Bitcoin price. The STOXX 600 rose over 3.3% while the DAX 40 rose over 3.8% during the past 30 days, when BTC price rose over 17.4%, according to TradingView.

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Alternative outlook: Bitcoin decouples from equities as “digital gold”

Bitcoin’s historical correlation with the traditional equities market has been mixed. However, Bitcoin could follow equities markets higher in an economic stimulus-driven environment. Kooner told Cointelegraph:

“Historically, Bitcoin has shown a mixed correlation with equities. During economic stress, Bitcoin often mirrors stock market trends as investors liquidate assets. In a stimulus-driven environment with lower rates, Bitcoin may benefit alongside equities due to increased liquidity.”

However, Bitcoin price saw a strong rally this year, despite the lagging equities market in the world’s largest economy, the United States. The S&P 500 index rallied over 11.5% year-to-date (YTD) while Bitcoin price rose over 57.6% YTD, according to TradingView.

“While US equities have retraced, BTC has remained strong. It remains to be seen if this is crypto lagging or relative strength,” added Kooner.

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