Inflation and the Fed meeting: why should crypto traders monitor US macro data?

Traditional economics plays a significant role in the crypto market, especially when it comes to monetary policy and macroeconomic indicators such as interest rates, Treasury yields, consumer price index (CPI), and government debt. These factors can influence investor sentiment towards riskier assets like cryptocurrencies and impact their prices.


In the United States, important economic data was simultaneously unveiled, prompting an immediate reaction from the cryptocurrency market upon receiving the latest news reports.

On June 12, several significant reports were made public by American authorities. Among them were the Federal Reserve’s updates on inflation figures and benchmark interest rates. How did the cryptocurrency market respond to this recently unveiled macroeconomic data?

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Inflation has slowed

As a researcher studying economic trends, I’ve noticed that the rate of annual inflation in the United States experienced a slight decrease from 3.4% in April to 3.3% in May. This figure fell short of the anticipated consensus forecast of 3.4%, making it the lowest recorded inflation rate since the previous month, April 2021.

The index that excludes food and energy price fluctuations grew by 0.2% compared to the last month and rose by 3.5% versus May of the previous year. These figures represent a decrease from the 0.3% increase and 3.6% growth recorded one month prior. Analysts had projected a deceleration in annual growth to 3.5% and monthly expansion to just 0.3%.

As a crypto investor, I’ve noticed that macroeconomic data has been a significant driving factor behind recent price movements. For instance, Bitcoin experienced a 2% increase within the first quarter-hour, while Ethereum saw a more pronounced growth of 2.5% over the same period.

Inflation and the Fed meeting: why should crypto traders monitor US macro data?

The Fed kept its interest rate

The U.S. Federal Reserve System maintained the interest rate range at 5.25–5.5% per annum.

The announcement led to a downturn in the cryptocurrency market. Bitcoin dipped below its previous price of $69,000. Furthermore, the majority of the top ten digital assets experienced minor price decreases based on CoinMarketCap’s latest figures.

What were crypto traders waiting for?

Before the release of significant inflation figures and the Federal Reserve’s scheduled meeting, analysts at K33 Research warned that investors in unregulated cryptocurrency derivative markets face heightened risks, potentially leading to extensive margin calls or liquidation of long positions prior to major economic announcements.

Experts calculate that the open interest in Bitcoin perpetual contracts has reached its highest point in the past year, following a two-week surge. Those who placed optimistic wagers during this timeframe have experienced paper losses on their investments.

As a crypto investor, I’ve noticed that the substantial inflows into the Bitcoin ETF (K33) might not solely be due to arbitrage opportunities between the spot and futures markets. Instead, it seems that these inflows mainly represent growing demand for BTC, rather than investors hedging their positions. In simpler terms, people are buying more Bitcoin through the ETF as opposed to using it for hedging purposes or taking advantage of price differences in the spot and futures markets.

Indicators for crypto community to keep an eye on

Fed rate and impact on Bitcoin

The Federal Reserve System’s (Fed) base rate represents the interest rate at which banks lend to one another on a short-term basis within the U.S. This rate serves as the primary tool for monetary policy in America. Modifications in the base rate can bring about substantial consequences for the financial sector and stock market, with ripple effects on asset classes such as Bitcoin and alternative cryptocurrencies.

When the Federal Reserve raises its base rate, the cost of borrowing money becomes more expensive. In times of robust economic expansion, the Fed typically maintains a low base rate to foster investment and decrease overall saving. Since high-risk assets like Bitcoin offer higher potential returns, they become increasingly attractive to investors when traditional savings and low-risk investments yield less. As demand for these assets increases, their prices tend to rise accordingly.

In times of economic downturn or instability, the Federal Reserve increases its benchmark interest rate. This action prompts individuals and businesses to save more and dispose of risky investments. Consequently, they opt for safer investment opportunities with rising returns.

The Fed rate is an essential factor, but it is not a determining factor in cryptocurrency prices. 

Treasury bonds

As a crypto investor, I’ve noticed that the significant drop in 10-year Treasury yields from their November 2023 peak at around 4.6% down to 4.47% in early May has made high-risk assets like tech stocks and cryptocurrencies more alluring. With lower yields on safer bonds, the perceived risk of investing in these assets appears comparatively smaller, potentially leading to increased demand and higher prices.

The Federal Reserve’s determination to hold interest rates at around 5.25-5.5% could push risky assets, including cryptocurrencies, towards a significant price adjustment. This decision stems from the Fed’s inability to meet its inflation objective of 2%.

Consumer price index

As an analyst, I would explain that the Consumer Price Index (CPI) is a key indicator of how the overall cost of goods and services bought by a specific population group has changed over time. It provides insights into inflation or deflation trends in the economy, serving as an essential tool for monetary regulators when making informed decisions on economic policy and ensuring financial stability.

As an analyst, I would express it this way: The Consumer Price Index (CPI) serves as a crucial indicator of inflation levels. When CPI values rise significantly, it signifies that the buying power of fiat currencies such as the U.S. dollar is decreasing.

A rise in Consumer Price Index (CPI) could potentially boost the value of the first cryptocurrency. This is because CPI serves as an indicator of inflation, and cryptocurrencies, particularly Bitcoin, can function as an alternative form of value storage that is not tied to any specific country’s economic policy. In simpler terms, when inflation rises in a particular currency, investors might look towards cryptocurrencies as a hedge against inflation.

Inflation and the Fed meeting: why should crypto traders monitor US macro data?

In reality, the relationship between Consumer Price Index (CPI) and Bitcoin’s price isn’t consistently positive or clear-cut. The digital currency market is renowned for its volatility, which stems from various influencing factors. These factors encompass the mood of market participants, groundbreaking technological developments, regulatory decisions, and the broader economic context.

A high cost per investment (CPI) in Bitcoin might pique the interest of potential investors. Yet, if such heightened interest emerges amidst reports of regulatory constraints for the crypto industry, the anticipated price surge could potentially fail to materialize.

U.S. national debt

This year, the U.S. national debt surpassed $34 trillion for the first time, a troubling milestone for financial analysts. Some experts believe that Bitcoin could serve as a primary safeguard as the U.S. national debt continues to expand.

The expanding American government debt causes apprehension among investors regarding the country’s financial future, prompting them to allocate more resources towards investments in cryptocurrencies and gold, ultimately boosting their worth.

Inflation and the Fed meeting: why should crypto traders monitor US macro data?

As a researcher, I’ve observed some intriguing developments in the world of finance recently. Michael Hartnett, the chief strategist at Bank of America, has highlighted that Bitcoin spot Exchange Traded Funds (ETFs) have experienced remarkable growth over the past month. He anticipates a “blowout year” for these funds due to several factors, including the weakening dollar.

Over the past two weeks, there has been a significant increase in investments flowing into new Bitcoin ETFs. This surge has sparked speculation among some market observers that Bitcoin could potentially surpass gold’s position as the leading safe-haven asset.

Forbes

Is traditional economics important for the crypto market?

The influence of U.S. monetary policy on the cryptocurrency sector has been noticeable for some time now, with this relationship becoming more apparent since Bitcoin’s correction in 2018 and during the bear market in 2022-2023.

As a crypto investor, I’ve observed that a reduction in the key interest rate often leads me to consider investing in riskier assets like Bitcoin. The rationale behind this is that lower borrowing costs make it more appealing to take on greater risks. Conversely, during economic recessions and subsequent rate hikes, I tend to favor more traditional and safer investment options as uncertainty increases and the cost of borrowing becomes more expensive.

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2024-06-13 16:52