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The Relationship Between Economic News and Crypto Prices May Be Improving

source-logo  coindesk.com 26 May 2023 06:36, UTC

Crypto markets reacted tepidly to solid economic data, a potential sign that good-economic-news-equals-bad-news for digital asset prices narrative is beginning to shift.

For much of the past 18 months, crypto markets have fallen following job and productivity gains that signaled the economy was still expanding and bedeviling high inflation remained untamed. But now good economic news may lead to improved cryptocurrency prices, or at least have minimal effect.

On Wednesday, the U.S. Labor Department announced that 229,000 Americans had filed for unemployment benefits last week, 4,000 higher than the prior month, but well below expectations of 245,000. Meanwhile, the U.S. economy expanded for the third consecutive quarter, as second quarter gross domestic product (GDP) grew by 1.3%.

Crypto markets reacted positively at first, as bitcoin and ether rose 0.44% and 0.71% on heavy volume. Prices retraced in subsequent hours, with both assets trading flat as of publication.

Traditional financial markets were mixed, with the S&P 500 and Nasdaq Composite Indexes opening higher, while the Dow Jones Industrial Average (DJIA) declined.

Worth noting is the direction and magnitude of change following the data releases. We can gather a few points from what’s occurred over the last 12 months.

Elevated inflation remains a concern for the Federal Open Market Committee (FOMC).

Federal Reserve Chair Jerome Powell has viewed a robust job market as an obstacle to reducing inflation as prices rise when economies expand. Job growth is a sign of economic strength.

As a result, asset prices have often responded negatively to strong jobs data and positively to poor jobs data.

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

With interest rates now at 5.25% and inflation slowing, the market reaction to strong data may become more positively correlated, which bodes well for cryptocurrencies as the economy improves.

FOMC minutes from its meeting earlier this month indicate that U.S. central bankers expect to keep interest rates between 5%-5.25%, through January of 2024.

Central bankers did not signal whether they would tighten or relax the Fed’s current monetary hawkishness and otherwise remained cautious in their remarks, at one point noting “the possibility that the cumulative tightening of monetary policy could affect economic activity more than expected”

But bankers also said they expected a “mild recession starting later this year, followed by a moderately paced recovery”.

Bitcoin holders could find themselves with opportunities for profit if the recession followed by a rebound occurs as expected. If the relationship between crypto and macro shifts to a good-news-equals-good-news one, the expected recession will likely have a negative impact on prices, resulting in a lower acquisition price for traders.

A moderately paced recovery could present outsized returns for those who accumulate a position ahead of it.

A proxy for bitcoin’s connection to economic growth would be its correlation to copper. Price movement in “Dr. Copper” often indicates economic strength. Bitcoin’s correlation with the metal has risen from -0.63 on May 9, to 0.85 implying a strong relationship between the two.