A soft U.S. inflation report due later today is likely to provide a favorable outlook for risk assets, including bitcoin (BTC). However, expectations for a dramatic price surge may be too optimistic.

The U.S. Labor Department is set to release January’s consumer price index (CPI) report at 13:30 UTC. Market forecasts suggest a 0.3% month-over-month increase in the cost of living, down from December’s 0.4% rise, according to data tracked by Reuters and FXStreet. The annual CPI figure is expected to remain steady at 2.9%, unchanged from December.

Core inflation, which excludes volatile food and energy sectors, is expected to show a 0.3% month-over-month increase, up from 0.2% in December, bringing the annualized rate to 3.1%, slightly lower than December’s 3.2%.

A lower-than-expected CPI reading, particularly in the core figure, could fuel expectations for additional Federal Reserve (Fed) interest rate cuts. This could drive down Treasury yields and weaken the U.S. dollar, ultimately boosting demand for riskier assets like bitcoin. Currently, market expectations for a rate cut in 2025 are at 54%, according to CME’s FedWatch tool.

However, while a rate cut could support BTC, it is unlikely to spark a major breakout from its ongoing consolidation in the $90,000 to $110,000 range.

Market indicators suggest inflation could rise again in the coming months, particularly as trade war concerns continue. This could limit the Fed’s ability to implement aggressive rate cuts. Data from Mott Capital Management reveals that two-year inflation swaps have surged to nearly 2.8%, their highest levels since early 2023, with similar increases observed in five-year swaps. These trends indicate that inflationary pressures could persist, potentially delaying the Fed’s goal of reaching a 2% inflation target.

Moreover, several investment banks believe that a modest CPI reading for January won’t lead to significant changes in the Fed’s stance. Fed Chairman Jerome Powell noted in his testimony on Tuesday that the central bank is in no rush to cut rates.

RBC’s weekly note suggests that while inflation may be easing slightly, it won’t be enough to convince the Fed to adjust its policy. BlackRock also noted that persistent inflation in services will likely keep the Fed focused on maintaining higher rates for a longer period.

If the CPI report exceeds expectations, bitcoin may fall toward the lower end of its $90,000 to $110,000 trading range.