No more rate hikes as a recession is coming. How will Bitcoin react?

No more rate hikes as a recession is coming. How will Bitcoin react?

Written by: Michaël van de Poppe

The likelihood of a potential rate hike is significantly increasing, as we've had several key triggers aiming at a potential pause. Not only a potential pause of the policy, designed by the FOMC, but also a potential recession seems apparent. How will that correspond to a potential bullish case for crypto and Bitcoin? Let's talk about that in the current update of the Trade Letter!

Firstly, this week is a massive week as a ton of economic data is delivered to the markets and that data is a guideline for the markets. Are we going to be more risk-off or are we expecting future economic growth and are we more risk-on? All things to consider.

The first big event of the week was Job Openings and Consumer Confidence.

Consumer confidence is a signal of strength in the economy as a higher consumer confidence often leads to a higher number of expansion on the expenses of consumers. A lower number shows weakness and consumers slowly, but surely, quit their expanses and saving money to be prepared for a potential downward turn on the economy. The expected number was 116.0, the reality is 106.1. A miss of almost 10%, which is massive!

Secondly, we've got the JOLTS Job Openings data point. This is also an indicator of strong/weak economies and should be an indicator about the labor markets, which is one of the corner stones for the FOMC to decide whether or not we'll be having another rate hike. The expected number was 9.49M, reality provided 8.83M. This is the first big miss on the labor markets, which shows a small signal of a weaker economy, hence less arguments for the FOMC to continue the policy and also a continuation of the potential case that a recession is looming.

Today, the second data point is provided to the markets in the form of the ADP Non-Farm Employment Change and the Prelim GDP.

The ADP Non-Farm Employment Change is a second number on the labor markets, through which the big data point comes out on Friday with the Unemployment Rate. However, the other data points are slightly more forward looking instead of the Unemployment Rate.

The number came in at 177K, while 194K was expected. Another signal, the second day in a row, where we see the weakness on the labor markets potentially signalling a recession is looming.

Now, is a recession looming? If we watch the economic data, the GDP q/q gives a positive number of 2.1%. What do we need for a recession? Exactly, two quarters of negative GDP in a row. That's very far from reality at this point, however, we can see that the Prelim GDP q/q data point is revised from 2.4% to 2.1%. The GDP data comes in three data points, first one is the Advanced one, the second one is Prelim (this data point) and next month we've got the final data point.

After that we'll have a new data point and most likely the rumours of a potential recession to start.

Now, why would that be important for Bitcoin? Well, Bitcoin goes in tandem with other assets as the asset is correlated to them. Whether you like it or not. Remember how the reaction was in March, when six banks fell apart in a matter of a few weeks? Exactly, Bitcoin skyrocketed. Alongside Gold and Silver, Bitcoin was one of the strongest assets in town.

More data points will be on the horizon in the upcoming week, but we can make sure that we're getting a potential case of the top on the U.S. Yields, as the expectations of further rate hikes are dwindling away. Let's have a look at the chart of the U.S. 10-year Yields.

This chart shows the Yield you'll be getting on a 10-Year Government Bond in the U.S. The chart is interesting, as we can see that we're having a sweep of the recent high. This high was taken out and immediately, the value of the Yields started to fall substantially.

This indicates that people want to start buying government bonds (or the government or banks themselves) and that the yields are turning around. In that regard, a potential Monthly bearish divergence can be created and the likelihood of a turn-around is happening here. Now, let's add the 2-Year Yields chart.

The 2-Year Yields are even more apparent than the 10-Year Yields, as they indicate that we're having a potential top in the making. A massive weekly bearish divergence starts to apply, and there's no continued progress on the markets of sellers of Treasuries stepping in. As a matter of fact, the amount of people shorting Treasuries are going through the roof, so the likelihood of a reversal is increasing (this means that the Yields are going to fall of a cliff).

There's an example of a previous case where the markets started to turn around in this chart and that's shown in 2018. During that period, a bearish divergence was also applied on the markets and, from there on, the markets started to make a U-turn, in which Yields were falling substantially. Why is that interesting? Let's compare the chart with Bitcoin's price action.

If we compare the current chart with BTC/USD on a different price scale (orange line is Bitcoin), some interesting key notes can be derived.

The previous top in November of 2018 marked the low on Bitcoin. We broke down, but the top of the Yields resulted into the bottom of the bear market for Bitcoin. The continuation of the selloff on the Yields resulted into more and more strength on the Bitcoin markets.

The first real high in November of 2022 also marked the low of Bitcoin. And the previous time we started to have a substantial selloff on the markets for Yields (March '23), the price of Bitcoin started to rally upwards significantly.

What would that say towards us? It says us that the likelihood of a potential reversal on the Yields is going to be beneficial for the Bitcoin markets. It's an ingredient which we prefer to have. Isn't it a coincidence that Blackrock advocates Bitcoin as the next big asset, when the U.S. economy is on the verge of a collapse? The previous time that we've had Gold being accepted as an ETF, it went into a giant bull market.

Now, the markets for Bitcoin are comparable towards 2015. It's sustaining above the 200-Week EMA.

The 200-Week EMA is a key indicator. Holding above that level is an important indicator of continuation here.

I think we'll hold above. The question is, are we going to have more rate hikes? I don't think so. Maybe one, but that should be it.

If Bitcoin sustains above the 200-Week EMA, the bottom is in. The crypto markets will most likely surge based on the fact that we're a safe haven as an asset.

Thanks for reading, see you again on the new update!