The U.S. economy showed unexpected strength in the second quarter, with GDP growth revised to 3.0%, up from the initial 2.8% estimate. This upward revision suggests that the economy is performing better than many anticipated, potentially avoiding a recession for now.
This growth rate could influence the Federal Reserve’s decisions regarding interest rate cuts. Higher GDP growth might lead the Fed to reconsider reducing rates, as high rates tend to limit borrowing, reducing money flow into riskier investments such as Bitcoin.
Federal Reserve and interest rates
Market observers had already expected the Federal Reserve to slow down its pace of rate cuts. Following the initial GDP figures, Bitcoin experienced a 5.2% jump, possibly reflecting a “buy the rumor, sell the news” scenario. However, with the stronger GDP revision, the likelihood of the Fed holding steady on rates increases, potentially impacting market dynamics in the near term.
The GDP deflator, a measure of inflation, also rose from 2.3% to 2.5%. While this increase is insignificant, it suggests a subtle uptick in inflationary pressures. For Bitcoin, even a small rise in inflation can enhance its appeal as a hedge against a weakening dollar.
BTCUSD price chart ⏐ Source: Tradingview
Inflation Dynamics and Bitcoin’s Position
The Federal Reserve may continue its current approach and avoid aggressive rate cuts if inflation remains moderate. This situation leaves Bitcoin in a holding pattern, awaiting clearer signals from the Fed. The cryptocurrency’s price recently returned to its previous range, with key support at around $56,000. Should Bitcoin maintain this level, it might test the $64,000 mark again. However, a drop below the support level could signal further losses.
The Fear & Greed Index, currently at 45, indicates a neutral market sentiment. Uncertainty about the market’s direction reflects the broader picture of the U.S. economy, which continues to show resilience. While above the Fed’s 2% target, inflation is significantly lower than the pandemic peak of 9%.
Labor market stability and market reactions
Despite concerns, the labor market remains relatively stable. Workers’ wages have not declined significantly, and layoffs are low. Although unemployment has risen slightly, it remains within manageable limits. The Department of Labor’s recent jobless claims data showed no significant change, maintaining a steady labor market outlook.
Interest rate expectations vs Bitcoin price ⏐ Source: blog.coinshares.com
Stock markets responded positively to the GDP revision, opening higher. However, the probability of the Fed implementing a substantial rate cut, such as a 50 basis point reduction, next month has decreased. While the market anticipates some rate cuts, expectations for dramatic moves are now tempered.
The mixed signals from economic data present a challenging environment for the cryptocurrency market, especially Bitcoin. If the Fed maintains steady rates, capital may return to traditional assets, making Bitcoin less attractive to short-term investors. Future projections suggest that Q3 GDP is estimated to be around 2%. Should unemployment rise, the Fed might consider rate cuts, but caution appears to be the preferred path unless a significant change in economic data occurs.