Last Friday, the US released non-farm payroll data, which was not as expected but not too bad either. Currently, the market predicts a 70% probability of a 25 basis point interest rate cut by the Fed in September, while the probability of a 50 basis point cut has dropped to 30%. Analysts at StarEx Exchange believe that the Fed is once again leaving the market in a predicament. Although US Treasury Secretary Yellen claims that the US economy is performing well and achieving a "soft landing," the market isn't very convinced.
A 50 basis point rate cut is seen as a positive move for monetary policy but it also raises concerns about an economic recession. Therefore, the market still needs to wait for the actual implementation of the rate cut in September and the subsequent release of economic data to provide more certainty. Currently, both traditional financial markets and the cryptocurrency market are focused on the US. Not only are major institutions torn, but the Fed is also in a dilemma.
What will be the Fed's interest rate cut strategy? Will they expand their balance sheet? Will the economy decline? These major questions currently have no clear answers. If there is an interest rate cut, it could trigger leverage from "yen-dollar" arbitrage funds, leading to a collapse in liquidity and a subsequent crash in asset prices. However, if there is no interest rate cut, high interest rates and heavy debt will increase economic pressure and raise the risk of a recession. If the Fed expands its balance sheet again by injecting liquidity into the financial system through currency issuance, the dollar may face greater depreciation pressure and inflation may return, shaking the credit foundation of the dollar and damaging its core interests.
As the uncertainty of the US economic recession intensifies, the Fed faces a dilemma between a "soft landing and a depreciation of the dollar" and a "strong dollar and a hard landing." The former may damage the global credit status of the dollar, while the latter could lead to a market collapse. There are also legislators who propose anchoring the dollar to Bitcoin, using cryptocurrency as a reservoir for the dollar.
For the crypto market, there is currently a lack of hotspots, concepts, narratives, and large capital flows, and even the once hot meme trading has become subdued. The transaction fees (gas fees) for Bitcoin and Ethereum have hit historic lows, and industry dynamics feel like "stagnant water." In the coming months, US economic growth and Fed policy will be key factors determining market trends.
Analysts at StarEx Exchange believe that in this context, funds are further concentrating on Bitcoin to mitigate risks. Currently, Bitcoin has reached a new high in market dominance, indicating strong market preference. Bitcoin remains the stable backbone of the entire crypto market, and this situation is unlikely to change significantly until new ecosystem and narrative developments occur in the industry.
In the short term, the breakthrough of expected ecological narratives remains difficult to achieve and there is a need for major macro-level events to break the current deadlock. However, no matter which policy choice the Fed makes, it is like walking on a tightrope at high altitude, filled with risks. Therefore, funds choose to wait and see, waiting for clear signals from the market.
The original expectation in the market was that the US economy would achieve a soft landing and the Fed would gradually cut rates. However, in early August, a minor news about the yen raising interest rates caused severe fluctuations in global financial markets, resulting in circuit breakers in the Japanese stock market and a collapse in the cryptocurrency market. If there are larger actions in the future, the risk of a market crash will also increase. From the perspective of institutions, without a clear direction, they are hesitant to enter the market.
From the end of August to the end of October 2023, the price of bitcoin continued to fluctuate. However, after Yellen announced liquidity injection, bitcoin began to rise rapidly and reached a historic high in March of the following year. Although history will not simply repeat itself, with the approaching of the Federal Reserve's September meeting, the market expects the federal funds rate to be further lowered. Analysts at StarEx Exchange believe that regardless of the strategy the Federal Reserve adopts, it may ultimately have to rely on expanding the money supply to maintain economic stability, which will provide opportunities for the rise of risk assets such as bitcoin.