What Next for Crypto After Friday’s Strong US NFP Data?

Key Points

• Cryptocurrencies were choppy on Friday as traders digested stronger-than-expected US jobs data.
• Crypto is holding up well despite the build-up of Fed tightening bets, perhaps an improved US economic outlook.
• Focus now turns to US CPI data next week, which is expected to show a moderation in headline price pressures.

Strong US Jobs Data Boosts Optimism US Economy Not in Recession

Friday was a choppy day for cryptocurrency markets, with prices initially slipping in wake of a much stronger than expected US labor market report, though recovering most of their earlier lost ground by the end of the day. Bitcoin was last changing hands around $23,200, having earlier dipped to $22,800.

The US economy added 528,000 jobs in July, far more than the 250,000 expected by economists, while June’s non-farm payroll gain was revised higher to 398,000 from 372,000. July’s gain saw the headline non-farm payroll employment finally recover back to its pre-Covid-19 pandemic level, 30 months on, and marked a 19^th successive month of job gains. The unemployment rate also fell to 3.5% from 3.6%, a new post-pandemic low, though this was in part due to a drop in the participation rate.

The latest jobs data, as well as US ISM Services PMI data earlier this week that unexpectedly jumped in July, paints a picture of a US economy expanding at a healthy pace at the start of Q3 2022. So much for that recession, the US economy is allegedly in.

Markets Rebuild Fed Tightening Bets, But Sentiment Holds Up

Meanwhile, the pace of Average Hourly Earnings growth accelerated to 0.5% MoM and 5.2% YoY from 0.4% and 5.1% in June. This pick-up in wage growth was particularly concerning for those hoping to see a moderation in wage-price pressures, which could help to bring headline consumer price pressures back towards the Fed’s 2.0% goal.

All said, analysts interpreted the data as strongly supportive of a continued fast pace of monetary tightening from the US Federal Reserve in the months ahead. Money markets quickly adjusting to imply a more than 70% chance of a 75 bps rate hike at the central bank’s next meeting in September, which mark a third consecutive move of this magnitude from around 34% a day earlier.

This repricing of Fed tightening bets towards a more hawkish outlook was likely what initially weighed on crypto, as was also initially the case for stock prices. However, US equities had recovered the bulk of their earlier losses by the close of trade, helping lift crypto.

Why is Crypto Holding Up So Well?

The Fed’s hawkish shift from viewing inflation as transitory and not worthy of a monetary tightening response as recently as Q4 2021 to its current stance of wanting to tighten policy significantly is one of the key factors behind the ongoing crypto bear market that began last year. So why has the latest build-up in hawkish Fed bets in wake of the latest US jobs data not hurt crypto prices?

Well, it’s still early days and crypto investors may yet take a more cautious view on things over the weekend/next week, meaning a further pullback from recent highs is very possible, but the continued optimism is likely due to the fact that recent data has pointed to two recent positive developments in the US economy.

Firstly, as mentioned above, US economic data (jobs and ISM services PMI) this week has pointed to an economy that is by no means in recession. If anything, the US economy appears to be heating up. Of course, that could be a bad thing for crypto if it means higher inflation and a more hawkish Fed, which Friday’s jobs data did trigger some fears of.

But both of this week’s ISM reports (manufacturing and services) alluded to a substantial decline in price pressures faced by businesses, with both showing a large drop in the prices paid subindex. Recent price action in US energy markets, in particular with WTI falling to fresh lows since prior to Russia’s February invasion of Ukraine under $90 per barrel, will further boost optimism of lower inflation ahead.

In other words, the argument for US inflation having peaked in June looks pretty strong. And if it has peaked and falls a reasonable amount in the coming months, this will ease fears about the Fed taking interest rates to, say, beyond 4.0% in 2023. You only need to think back to around six weeks ago to a time when US inflation appeared to be accelerating whilst growth appeared to be slowing to see how the economic backdrop has improved, arguably warranted higher cryptocurrency valuations.

What Next for Crypto?

Inflation remains at the front of investor focus next week with the release of US Consumer Price Index data for July on Wednesday. Headline CPI is seen rising at a rate of 0.2% MoM and 8.7% YoY in July, down from 1.1% and 9.1% respectively in June. Meanwhile, Core CPI is seen rising 0.5% MoM and 6.1% YoY versus June’s 0.7% and 5.9% respective readings.

The drop in headline price pressures would be a welcome validation of peak inflation hopes and this has the potential to boost sentiment in cryptocurrency markets. Focus will then turn to the release of the University of Michigan’s Consumer Sentiment survey for August next Friday, which contains a widely followed measure of one- and five-year consumer inflation expectations.

Any further moderation in these could further boost hopes about a more benign inflation outlook in the quarters ahead and reduce fears about the Fed needing to go super restrictive in 2023. Major cryptocurrencies like Bitcoin and Ethereum both look to still be in uptrends and the bulls will be hoping that a combination of positive technicals and an improving macro backdrop back further boost prices in the weeks ahead.