Bitcoin (BTC) and the broader crypto market are on edge as key macroeconomic factors unfold. While traders await President-elect Donald Trump’s inauguration on January 20, which could be a bullish catalyst for cryptocurrencies, there is also growing concern about potential rate hikes by the Bank of Japan (BoJ) that could disrupt the market’s momentum.

Japan’s headline inflation rate has risen to 2.9% year-over-year, its highest in three months. If inflation continues to surprise on the upside, it could lead to fears of tightening in the global financial system, which may negatively affect risk assets, including Bitcoin. A hotter-than-expected inflation report on January 23 could trigger a rate hike by the BoJ, which is widely anticipated to occur on January 24, with a 90% chance of the move, according to Bloomberg’s data.

A rate hike by the BoJ could set off another round of volatility, similar to what happened in August when a previous BoJ rate increase caused a sharp unwinding of the Yen carry trade. This event contributed to Bitcoin’s sharp decline to $49,000. As the market braces for this potential move, traders are preparing for another wave of selling.

The Bank of Japan has maintained negative interest rates since 2016, but in 2024, it raised rates twice, from -0.1% to 0.25%. The upcoming rate decision is expected to reflect an implied rate of 0.45%, but this could change depending on the inflation data released just a day before.

The U.S. dollar index (DXY) has remained resilient, sitting above 109, signaling strength for the dollar. The DXY index’s performance mirrors the trend during Trump’s first term when it rallied leading into his inauguration and then dropped, benefiting risk assets. Meanwhile, the Japanese Yen has strengthened against the dollar, reaching a level not seen since December 16, at 156.

With all eyes on the BoJ’s rate decision and the potential impact of Japan’s inflation data, Bitcoin’s price could face headwinds. The combination of inflation, rate hikes, and the strong dollar could introduce significant volatility in the coming weeks, adding uncertainty for crypto traders.