The crypto market is up today and Bitcoin (BTC), Ether (ETH), Solana (SOL) and other altcoins are rallying in anticipation of fresh United States economic data this week.

BTC/USD 1-hour candle chart (Bitstamp). Source: TradingView

Is crypto volatility about to return?

Data from Cointelegraph Markets Pro and TradingView confirmed BTC/USD hitting its highest since Dec. 16, 2022.

Despite the strength of recent performance, the uptrend's longevity remains in question as investors anticipate comments from the Federal Reserve which should hint at future policy, including the size of 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

Now, odds are favoring Consumer Price Index (CPI) data for December, 2022 bolstering the prevailing narrative that U.S. inflation has peaked.

Generally, the crypto market is still significantly down from its all-time highs, but Ether’s price reacted positively by rallying to a near 1-month high on Jan. 9.

ETH/USD 1-day candle chart (Binance). Source: TradingView

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 lowest volatility in year, some analysts believe that price whipsaws are on the verge of returning. In the meantime, however, BTC price action remains comparatively rangebound.

Cointelegraph examines three of the major factors influencing crypto market strength on the day.

Cooling demand amid robust job market puts the FOMC center stage

High inflation was a major problem in 2022 and the recent PMI data may give the Fed multiple reasons to taper interest rate increases. If inflation were to level off, which is something the PMI 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 25 basis points, not the previous 50 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”

He will speak again on Jan. 10, two days before the CPI data.

Analysts and traders bet on CPI crypto boost

The first CPI release of 2023 is widely expected to support the downtrend in inflation, but any surprises could spark additional volatility across crypto and risk assets.

As Cointelegraph reported, some are looking at a figure of less than 7% as a line in the sand for such a reaction to occur.

"We MAY see another leg down in SP500 and Nasdaq this week - like below!" macro economist Henrik Zeberg told Twitter followers on the day alongside an explanatory chart.

"We got Powell speaking tomorrow and CPI on Thursday. BUT....this does not change a thing!! The Bull has begun led by Non-US-markets."
S&P 500 futures 1-day annotated chart. Source: Henrik Zeberg/ Twitter

Regarding the current market momentum, Ray Salmond, Cointelegraph's head of markets, said last week: 

"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."

Volatility has picked up as 2023 gets underway, providing some welcome contrast for traders facing barely any movement in either Bitcoin or altcoins.

Cast your vote now

U.S. dollar index (DXY) hits seven-month lows

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

Related: BTC price 3-week highs greet US CPI — 5 things to know in Bitcoin this week

The U.S. dollar index (DXY) recently hit its highest levels since 2002, but momentum has cooled in light of lessening in, dropping to seven-month lows on the day. In a perfect world, investors would ideally view a retracting DXY as a reason to increase sentiment for risk assets like cryptocurrencies.

U.S. dollar index (DXY) 1-day candle chart. Source: TradingView

"Massive rejection for the U.S. Dollar Index on the 200 day moving average cloud," analyst Caleb Franzen wrote in part of commentary on Jan. 9.

U.S. dollar index (DXY) annotated chart. Source: Caleb Franzen/ Twitter

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.

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.