Crypto Fundamental Analysis: Does NFP support the recovery?

At the start of July, one of the most relevant events for the cryptocurrency market has been the release of the US NFP report. The employment data came in weaker than expected and started to reduce expectations of a more aggressive Federal Reserve over the next few months.

This change has helped ease part of the pressure from the US dollar on cryptocurrencies and has supported a recovery in demand activity in the short term. For now, this scenario is important for the possible formation of a new buying bias, although it will still be necessary to see whether the recovery can hold over the next few trading sessions.

NFP week

During the week, the United States published its NFP employment data. The figure came in at 57,000 jobs created in June, well below the 115,000 jobs expected. The data also showed another sign of slowdown in the labor market, especially when compared with March, when job creation was above 200,000.

This dynamic could become an important factor for the Federal Reserve. On one hand, a slowdown in employment could help ease some inflationary pressures. However, it may also raise doubts about US economic growth over the next few months.

Source: TradingEconomics

The event was important for US interest rate expectations. According to the CME Group probability table, for the September 16 decision, which was when the market expected a possible new rate hike, there is now a 46.2% probability that rates remain unchanged and a 46.1% probability of a rate increase.

This scenario is relevant because, in previous sessions, the market assigned a higher probability to a rate hike. For now, the employment data has started to open the door to a more cautious stance from the Federal Reserve.

Source: CMEGROUP

This change matters for cryptocurrencies because part of the strength in substitute assets, such as the US dollar, came from expectations of higher rates in the United States. However, if the market starts to price in a less aggressive Federal Reserve, the dollar could lose some appeal and create room for a recovery in risk appetite.

This is already starting to show in Bitcoin open interest, an indicator that measures the total number of open buy and sell positions across different exchanges. Now, the indicator has shown a relevant recovery and is trading near the 22-billion-dollar area. This upward slope suggests an inflow of capital into the BTC market since the NFP release.

In addition, considering that Bitcoin’s price has also advanced over the last few sessions, the increase in open interest could be mainly associated with a stronger inflow of buying positions.

Source: Cryptoquant

Therefore, expectations of a less aggressive Federal Reserve have allowed new capital to enter cryptocurrencies and have improved the appeal of risk assets in the short term. If this perception holds over the next few sessions, the recovery in demand could remain relevant and support buying pressure across the crypto market.

 

Bitcoin compared with other markets

One of the most relevant short-term behaviors is the increase in the negative correlation between the DXY, the US dollar index, and Bitcoin price action. Now, the coefficient is very close to -1, showing an important inverse relationship between both markets over the last 25 sessions.

This means that, recently, Bitcoin has tended to move in the opposite direction to the US dollar. However, it is important to remember that correlation coefficients can change over time.

Source: Data – TVC, StoneX, Tradingview

This relationship is important because the recent loss of strength in the dollar, driven by expectations of a less aggressive Federal Reserve, has coincided with Bitcoin’s recent advance. In other words, lower demand for dollar-denominated assets could be creating room for risk assets, such as cryptocurrencies, to recover short-term appeal.

If this relationship holds and dollar weakness becomes more evident, the environment could remain favorable for a recovery in crypto appetite over the next few trading sessions.

 

Confidence starts to recover

Looking at the cryptocurrency Fear and Greed Index, there has been a relevant improvement compared with the previous week. Now, the indicator remains near the 23-point area, moving out of “extreme fear” territory.

This behavior shows that, although crypto market sentiment remains sensitive, confidence has started to recover in the short term.

Source: Coinmarketcap

The improvement in the indicator suggests that market participants are starting to move away from part of the risk perception that dominated the sector in previous weeks. If the index continues to advance, a more favorable environment could form for demand stabilization, which could continue to reflect relevant buying pressure around cryptocurrencies over the next few trading sessions.

 

Written by Julian Pineda, CFA, CMT – Market Analyst

Follow him on: @julianpineda25