Why is the crypto market up today?

The crypto market is up today and Bitcoin (BTC), Ether (ETH), Solana (SOL) and numerous altcoins rallied after data published by the Institute for Supply Management (ISM) on Jan. 4 which showed slower demand and lower input prices for manufactures which gave investors positive expectations that the Federal Reserve may reduce future interest rate hikes and a cooling US Dollar. 

Despite the strength of today’s rally, its longevity remains under question as investors anticipate the Federal Reserve’s meeting minutes on Jan. 4 to hint at the size of future interest rate hikes.

Crypto and equities markets responded positively ahead of the Jan. 6 nonfarm payrolls report and the cooling supply chain figures shown below could form the basis for softer rate hikes going forward.

Manufacturing overview. Source: ISM

Depending on clues provided in the FED meeting minutes, markets could see further upside, or a total retrace of today’s intraday gains could occur. 

Generally, the crypto market is still significantly down from its all-time highs, but Ether’s price reacted positively by rallying to a 3-week high at $1,253 on Jan. 4. Despite the gains, many traders are still nervous over the Grayscale Ether trust potentially converting to a Reg M which would allow spot price withdrawals and its possible impact on the market.

With Bitcoin’s record low volatility, some analysts believe that price whipsaws are on the verge of returning but in the meantime, the BTC’s range bound price action could be providing a boost for altcoins.

Let’s examine three of the major factors influencing crypto market strength on the day.

Cooling demand amid a robust job market puts the FOMC center stage

High inflation was a major problem in 2022 and the recent ISM data may give the Fed multiple reasons to taper interest rate increases. If inflation were to level off, which is something the ISM data may suggest, Powell suggested smaller hikes in subsequent months would happen if inflation were to decrease. 

In his FOMC press conference on Dec. 14, Powell noted the importance of the supply chain on inflation:

“You can break inflation down into three, sort of, buckets. The first is goods inflation, and we see now, as we’ve been expecting, really, for a year and a half, that supply conditions would get better. And, ultimately, supply chains get fixed, and demand settles down a little bit and maybe goes back to services a little bit. And we start to see goods inflation coming down. We’re now starting to see that in this report and the last one.”

February’s Federal Open Market Committee (FOMC) is currently expected to yield a hike of 50 to 75 basis points, not the usual 75 basis points, according to CME Group’s FedWatch Tool.

Fed target rate probabilities chart. Source: CME Group

Powell has cautioned that aggressive monetary policy may continue until the 2% target inflation rate is reached:

“Despite some promising developments, we have a long way to go in restoring price stability”

Analysts and traders analysts celebrate the “positive” CPI news

While Bitcoin and altcoins still have risk events that can impact the price, BTC futures are showing traders switching from majority short to long. According to Coinglass, 78.99% of traders are long Bitcoin at a ratio of 3.76 compared to BTC shorts.

Bitcoin long versus short ratio. Source: Coinglass

While the market is majority long, BTC volatility remains historically low. Combined with reduced spot volume, BTC volatility reached a 2.5-year low on Jan. 3 which is indicative of an upcoming price move. 

BTC 7 and 30-day volatility. Source: Arcane Research

Regarding the current momentum of the market, Ray Salmond, Cointelegraph’s head of markets said: 

“Record low BTC volatility could be giving traders some confidence in alts because Bitcoin price consolidation, or range-bound trading has historically laid the groundwork for market-wide altcoin rallies. In this situation, technical traders might lend further credence to TA components like market structure, convergence between moving averages and various support and resistance levels.”

Related: Bitcoin teases weekly highs as traders eye BTC price leg up to $17.3K

While Bitcoin and Ether price has been impacted by the endless flow of negative news, today’s rally shows a flash of bullish momentum. 

The dollar index (DXY) continues to cool off

After a parabolic uptrend throughout 2022, the U.S. dollar index is now beginning to show signs of cooling off.

The U.S. dollar index (DXY) recently hit its highest levels since 2002, and momentum may have cooled after data shows inflation peaking in June 2022. In a perfect world, investors would ideally view a retracting DXY as a reason to increase sentiment for risk assets like cryptocurrencies.

BTC and DXY correlation. Source: TradingView

DXY’s pullback has been in lockstep with a return to form for Bitcoin and altcoins. Historically, a cooling DXY is followed by Bitcoin price moving in the opposite direction.

Overall, crypto markets are likely to continue seeing price whipsaws and most analysts agree that there are plenty of volatile days ahead.

While the positive news of easing inflation ahead of the FOMC meeting minutes is providing a nice short-term bump in crypto prices, the market’s reaction to the upcoming non-farm payrolls and unemployment data, plus the CPI report will be the true determinant of which direction the market chooses to take.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk, and you should conduct your own research when making a decision.

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