Strong employment data pushes up interest rate expectations, crypto still benefits

The crypto market is beginning to price in the Fed raising interest rates in 2026, rather than just expecting rate cuts.

This development occurs after inflation remains above the Fed’s 2% target and US April employment data exceeded forecasts, making monetary policy expectations more hawkish for risky assets like crypto.

MAIN CONTENT

• Stronger-than-expected employment data has increased the probability of a rate hike in 2026 to 20.8%.
• Bitcoin is being mentioned more as an inflation hedge asset compared to gold.
• Bitcoin ETFs continue to attract capital, reinforcing market sentiment with BTC.

US employment data shifts expectations towards a policy pivot

The market reacted immediately after the US April employment report, which showed an increase of 115,000 jobs, well above the forecast of 65,000. The unemployment rate stood at 4.3%, as expected.

Previously, there had been no rate cuts this year, and inflation in the first quarter remained above the Fed’s target. By March, the crisis in West Asia pushed inflation up to 3.3%, the strongest monthly increase since May 2024, further reducing the likelihood of policy easing.

According to CME FedWatch Tool, the probability of a rate hike in 2026 rose to 20.8% after the stronger-than-expected employment data. This pricing indicates the market is leaning towards a more hawkish stance from the Fed.

Why a higher interest rate scenario is usually unfavorable for crypto

Higher interest rates often put pressure on risky assets because borrowing costs increase and liquidity tightens. When capital becomes more expensive, crypto generally struggles to maintain its upward momentum without support from other factors.

However, crypto’s behavior is not solely dependent on interest rates. In some periods, capital flows and expectations of fiat devaluation can still support Bitcoin and related assets, despite macroeconomic pressures.

Bitcoin is seen as an inflation hedge trade

The “debasement” narrative has become more prominent in Q2. The Dollar Index (DXY) has fallen more than 2% this quarter after three consecutive quarters of gains, indicating ongoing pressure on the USD.

In the context of the Fed continuously injecting liquidity, bond yields are suppressed as capital flows out of the debt market. This has led to increasing mentions of Bitcoin as an inflation hedge trade, even more so than gold.

The BTC/XAU ratio increased by 16.5% in Q2. Meanwhile, Bitcoin ETF funds recorded a net inflow of $1.25 billion, and with an additional $720 million in May, this month could surpass April to become the highest month of 2026 so far.

Source: TradingEconomics

ETF capital flows and the gold spread supporting Bitcoin

The continued inflow of ETF capital into Bitcoin indicates ongoing demand for this asset, despite unfavorable interest rate conditions. This factor helps BTC maintain a better position among macro hedging assets.

In the short term, the market is reflecting two simultaneous expectations: a more hawkish Fed and the belief that Bitcoin can still benefit from liquidity, inflation, and USD pressure. This tug-of-war may continue to influence crypto prices in the near future.

Source: SoSoValue

Summary

Strong employment data, persistent high inflation, and more hawkish Fed expectations are prompting the crypto market to reassess risks, while Bitcoin still receives support from ETF flows and its role as an inflation hedge.

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