With interest rates at 5.25% now and inflation slowing, the market reaction to the strong data may turn more positive, which will bode well for cryptocurrencies
Crypto markets are reacting indifferently to strong economic data, a potential sign that the “good news is bad news for digital asset prices” narrative is beginning to change, analyst Glenn Williams wrote in a CoinDesk op-ed.
For most of the past 18 months, crypto markets have been in the red following reports of gains in jobs and productivity — a sign that the economy is still growing and painfully high inflation remains rampant. But now, good economic news may lead cryptocurrency prices to improve, or at least have a minimal effect.
On Wednesday, the US Department of Labor announced that 229,000 Americans filed for unemployment benefits last week – 4 thousand more than the previous week, but well below the expected 245 thousand. Meanwhile, the US economy expanded for the third consecutive quarter, with the gross domestic product growing by 1.3%.
Crypto markets reacted positively at first, with Bitcoin and Ether gaining 0.4% and 0.7%, respectively, amid volume trading. In the hours that followed, prices fell, but returned to the green again on Friday, minutes before 1 p.m. Bulgarian time. Bitcoin is up 0.8% for the day at $26,462, and ether is up 1.5% at nearly $1,814.
Traditional financial markets did not find a common direction: the S&P 500 and Nasdaq Composite indices ended the session with gains, while the Dow Jones Industrial Average was at a loss.
It is worth noting the magnitude and direction of change after the data were published. We can summarize some things from what happened in the last 12 months:
– Accelerating inflation remains a concern for the Federal Open Market Commission.
– Federal Reserve Chairman Jerome Powell sees a strong labor market as an obstacle to slowing inflation as prices rise and the economy expands. Job growth is a sign of economic strength.
– As a result, asset prices often react negatively to strong earthquake market data and positively to bad ones.
For example, in December, lower jobless claims and an economic expansion led to lower asset values.
With interest rates at 5.25% now and inflation slowing, the market reaction to the strong data could become more positive, which will bode well for cryptocurrencies as the economy improves.
Minutes from the Federal Open Market Committee meeting earlier this month signaled that US central bankers are expected to keep interest rates between 5% and 5.25% until January 2024.
Central bankers did not signal whether they would tighten or loosen the Fed’s current tight policy and generally remained cautious in their comments, noting the possibility that the accumulative tightening of monetary policy could affect economic activity “more than expected.”
But they also noted that they expect “a mild recession beginning late this year, followed by a moderate-paced recovery.”
Bitcoin holders could find themselves with an opportunity to profit if the recession followed by a recovery plays out as expected. If the relationship between cryptocurrencies and macro data changes to “good news is good news”, then the expected recession will likely have a negative effect on prices, resulting in a lower buying price for traders.
A recovery at a moderate pace could represent a big return for those who have accumulated positions before.
A proxy for the relationship between Bitcoin and economic growth would be the correlation with copper. Copper price movements are often a signal of the state of the economy (from the slang expression “Dr. Copper” – a joke that Copper predicts turning points in the state of the world economy as well as if he had a PhD in economics, note ed.). Bitcoin’s correlation with the metal rose from -0.63 on May 9 to +0.85, indicating a strong correlation between the two assets.
