Investors shifted away from U.S. dollars earlier in the week to see signs of a steady Bitcoin price recovery. This was due to weaker-than-expected economic news.
Bitcoin’s plunge to below $33,000 last week was met by a strong buying sentiment, pushing its per-token rate to $39,300 on February 1. BTC’s local price was at $37,000, but it was up 13% since Thursday.
The U.S. dollar Index (DXY), which measures strength of the greenback against a basket top foreign currencies, rose last Friday to 97.441, its highest level since July 2020. The index fell by 1.50% to 96.00 on February 3.
Daily price chart of DXY and BTC/USD Source: TradingView
Some market analysts interpreted the dollar’s weakness as a sign that rate hike fears are receding.
Lyn Alden, founder of Lyn alden Investment Strategy, tweeted that Fed had “reached fever height last week” in terms of making more aggressive tightening scenarios. He also noted that the central bank could turn dovish as economic deceleration/weak PMI statistics takes center stage.
U.S. Factory Activity, Employment Drops
Alden mentioned the U.S. manufacturing growth which fell for the third consecutive month according to data released Tuesday. The Institute for Supply Management’s gauge for factory activity was at 57.60. This is compared to the 58.80 it recorded a month ago.
U.S. manufacturing growth data. Source: ISM, Bloomberg
ADP Research Institute data, released Wednesday, also revealed cracks in the ongoing U.S. economy recovery. It showed that regional employment fell by 301,000 in 2021, which is the highest level since the beginning of the Covid-19 pandemic.
The lower-than-anticipated data came a week after the Federal Reserve Chairman Jerome Powell’s press conference. To curb rising U.S. inflation, he suggested that interest rates could be raised three times by 2022.
Powell’s hawkish turn drove Bitcoin’s price down, as the U.S. Dollar strengthened.
U.S. rate forwards suggest that there will be four to five rate increases in 2022. James Bullard, the president of the Fed’s St. Louis branch stated earlier this week that five rate rises are “not too bad a wager.”
However, Powell’s hawkish remarks coincided with a rebound in Bitcoin markets as the dollar lost gains. Alden and other analysts suggested that the market might have overreacted.
Fed officials are now cautiously hawkish
The steady recovery in U.S. employment was one of the main catalysts for the Fed’s rate rise plans. The central bank may reverse its tightening plans if it receives lower-than-expected ADP readings.
Preston Pysh, founder of the Pylon holding company noted that “they have moved from almost all talk and very little action to 100% hot water.”
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Fed officials also suggested that rate increases might not be as aggressively pursued as expected by the central bank.
Esther George, Kansas City Fed president, stated that “unexpected adjustments” are not in anyone’s best interests. Mary Daly, chief of San Francisco Fed, cautioned against tightening to quickly.
Fed @ maximum hawkishness. Dovish starting here. The dollar’s implications
— Teddy Vallee (@TeddyVallee), January 28, 2022
The CME’s Fed Watch Tool currently predicts that there is a 94.40% chance of a 25-bps rate increase in March 2022. It is not clear if there will be back-to-back rate increases in the remainder of 2022.
Teddy Vallee, founder of Parvelle Global in New York, wrote: “They will rise, but not as many as the forward curve suggests.”
“Digital asset space pricing in worst case.”
The very narrative that drove Bitcoin’s price to multi-month lows last Thursday appears to have begun to falter.
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