It has been a tumultuous eleven months so far, as wider financial markets have grappled with periods of recession and stagflation, hard landings and soft landings.The drama of a government shutdown and the horror of war and conflict have been prevalent, whilst AI-mania has shone.These themes and narratives have swung through the course of 2023 with most participants initially expecting an economic slowdown, with even perhaps some 1970s-style stagflation.This was set to be caused by central banks slamming on the brakes with continued policy tightening, which has been the most aggressive that most investors have seen in their lifetimes.However, the world’s biggest economies have coped admirably with higher interest rates, confounding many who expected a recession.
Resilient growth in the US has sometimes meant the Fed continued raising rates, to the detriment of risky assets like cryptos, and especially the tech sectors which have led the gains in US stock indices.
But certainly bitcoin and other digital coins have advanced impressively through this volatile year.
“Soft landing” incoming?
The market narrative has now shifted towards the prospect of a soft landing on signs that pandemic-related inflation is easing.What does this actually mean?
The focus is now on the timing and the potential pace of future rate cuts, though we should acknowledge that central bankers cannot express the rate cut view in public as they would risk boosting risk sentiment to the point it loosens financial conditions too soon.
Crypto likes liquidity …
The reason for this scene-setting is that traditional asset markets and cryptocurrencies have one thing in common – they both love cheap, fiat liquidity.The potential advent of a Fed pivot and rate cuts being increasingly solidified has helped underpin support for riskier assets like cryptocurrencies.
The Fed is priced to be among the most dovish major central banks. With the disinflation process continuing, falling yields may also act as a drag on the USD.
That in turn could also be a tailwind to risk assets, as occurred in the latter part of 2020 and early 2021.A softer dollar causes an easing in financial conditions around the globe, incentivizing risk-taking.Along with broad positives like crypto ETF filings, the general macro environment continues to potentially be supportive for digital assets as well.More By This Author:This Week: EURUSD Traders Await ECB Inflation Reading BRN Struggles Below 200-Day SMA Amid OPEC+ Uncertainty USDJPY To Hit 150.055 Resistance Level?
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