Possible Improvement in the Correlation Between Economic News and Cryptocurrency Prices

Crypto markets exhibited a lukewarm response to favorable economic data, suggesting a potential shift in the narrative that equates good economic news with negative implications for digital asset prices.

Over the past 18 months, crypto markets have typically declined in the wake of positive job and productivity gains, indicating continued economic expansion and uncontrolled inflation. However, there are indications that good economic news may now lead to improved cryptocurrency prices or have a minimal impact.

Recently, the U.S. Labor Department reported that 229,000 Americans filed for unemployment benefits the previous week, slightly higher than the previous month but significantly lower than the projected 245,000. Additionally, the U.S. economy experienced its third consecutive quarter of growth, with second-quarter gross domestic product (GDP) expanding by 1.3%.

Initially, crypto markets responded positively, with bitcoin and ether experiencing a 0.44% and 0.71% increase, respectively, on substantial trading volume. However, prices retraced in subsequent hours, and both assets were trading flat at the time of publication.

Economic News and Cryptocurrency Prices

Traditional financial markets displayed mixed performance, as the S&P 500 and Nasdaq Composite Indexes opened higher while the Dow Jones Industrial Average (DJIA) declined. It is worth noting the direction and magnitude of the changes observed following the release of this data. Several observations can be made based on the events of the past year.

The Federal Open Market Committee (FOMC) remains concerned about elevated inflation. Federal Reserve Chair Jerome Powell perceives a robust job market as an obstacle to curbing inflation since prices tend to rise when economies expand. Job growth serves as an indicator of economic strength.

Consequently, strong jobs data has often resulted in negative reactions from asset prices, whereas poor jobs data has elicited positive responses.

For instance, in December, reduced jobless claims and economic expansion led to declines in asset values.

Given that interest rates now stand at 5.25% and inflation is slowing, the market’s response to favorable data may become more positively correlated. This correlation holds promising implications for cryptocurrencies as the economy progresses.

The minutes from the FOMC’s recent meeting indicate that U.S. central bankers intend to maintain interest rates between 5% and 5.25% until January 2024.

The bankers did not indicate whether they would tighten or loosen the Fed’s current monetary stance, and they remained cautious in their statements. At one point, they acknowledged the possibility that the cumulative tightening of monetary policy could affect economic activity more than expected.

However, they also expressed anticipation of a “mild recession starting later this year, followed by a moderately paced recovery.”

If the expected recession followed by a rebound occurs, Bitcoin holders may find profitable opportunities. In the event that the relationship between crypto and macro trends transitions to a good-news-equals-good-news scenario, the projected recession is likely to negatively impact prices, resulting in lower acquisition costs for traders.

Furthermore, if a moderately paced recovery unfolds, it could yield substantial returns for those who establish positions ahead of time.

An indicator of Bitcoin’s connection to economic growth can be found in its correlation with gold. Movements in the price often reflect economic strength. Bitcoin’s correlation with this metal has increased, suggesting a strong relationship between the two.

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