Crypto doesn't trade in isolation. Federal Reserve policy, dollar strength, and global liquidity drive major crypto moves. Understanding these relationships improves your timing and risk management.
Crypto behaves as a risk asset. When:
- Risk on: Money flows into crypto
- Risk off: Money flows out of crypto
The factors determining risk appetite are primarily macroeconomic.
- BTC vs Nasdaq: 0.6-0.8 during risk-off periods
- BTC vs DXY: -0.5 to -0.7 (inverse)
- BTC vs Global M2: 0.7+ over longer timeframes
These correlations strengthen during macro-driven markets and weaken during crypto-specific narratives.
Federal Funds Rate: - Higher rates = tighter conditions = risk off
- Lower rates = easier conditions = risk on
Quantitative Easing/Tightening: - QE (buying bonds) = liquidity injection = bullish
- QT (selling bonds) = liquidity drain = bearish
Forward Guidance: - Fed communication about future policy
- "Higher for longer" = bearish
- "Pivot" expectations = bullish
FOMC Meetings (8x/year): - Rate decisions
- Dot plot projections
- Powell press conference
Fed Minutes: - Released 3 weeks after FOMC
- Details of discussion
- Often moves markets
Jackson Hole Symposium: - Annual August conference
Pre-FOMC: - Volatility typically compresses
- Positioning for expected outcome
- Risk: Being wrong on direction
Post-FOMC: - Initial reaction often reverses
- Wait 15-30 minutes before acting
- Trade the sustained move
Between meetings: - Fed speakers can move markets
- Track CME FedWatch for rate probabilities
DXY measures USD against major currencies. Strong inverse correlation with crypto:
- DXY up → Crypto down
- DXY down → Crypto up
- Pricing: Crypto priced in USD, weaker dollar = higher nominal prices
- Liquidity: Strong dollar = tighter global liquidity
- Risk appetite: Dollar strengthens during risk-off periods
Track these DXY zones:
- 90-95: Weak dollar, bullish for crypto
- 95-100: Neutral zone
- 100-105: Strong dollar, bearish for crypto
- 105+: Very strong, significant headwind
def dxy_signal(dxy_current, dxy_20d_sma, dxy_50d_sma):
"""
Generate crypto signal based on DXY
"""
if dxy_current < dxy_20d_sma < dxy_50d_sma:
return "DXY downtrend - bullish for crypto"
elif dxy_current > dxy_20d_sma > dxy_50d_sma:
return "DXY uptrend - bearish for crypto"
else:
return "DXY mixed - no clear signal"
M2 = Currency in circulation + checking deposits + savings + money market funds
Global M2 tracks money supply across major economies (US, EU, China, Japan).
Crypto follows global liquidity with a lag:
- M2 expansion → 3-6 months → crypto rally
- M2 contraction → 3-6 months → crypto decline
Data sources: - US M2: FRED (Federal Reserve)
-
Global M2: MacroMicro, CrossBorder Capital
-
Key metric: Year-over-year M2 growth rate
-
5% growth: Expansionary
-
<0% growth: Contractionary
US M2 YoY: +3.5%
EU M2 YoY: +2.1%
China M2 YoY: +8.2%
Japan M2 YoY: +1.8%
Global M2 YoY: +4.1% → Moderate expansion → Slightly bullish
"Fear index" for stocks. Crypto sensitivity:
- VIX < 15: Low fear, risk on, bullish crypto
- VIX 15-25: Normal range
- VIX 25-35: Elevated fear, caution
- VIX > 35: High fear, risk off, bearish crypto
Difference between corporate and treasury yields:
-
Widening spreads: Credit stress, risk off
-
Tightening spreads: Risk on
-
Watch: High yield (HY) spreads, investment grade (IG) spreads
Build a composite:
def risk_sentiment_score():
"""
Composite risk sentiment (0-100)
"""
score = 50 # Neutral baseline
# VIX component
if vix < 15:
score += 15
elif vix > 30:
score -= 20
# DXY component
if dxy < dxy_50sma:
score += 10
elif dxy > dxy_50sma:
score -= 10
# Credit spreads
if spreads_tightening:
score += 10
elif spreads_widening:
score -= 15
# Equity momentum
if sp500 > sp500_50sma:
score += 10
elif sp500 < sp500_50sma:
score -= 10
return max(0, min(100, score))
Interpretation: - 70-100: Strong risk-on, favorable for crypto
- 50-70: Neutral to positive
- 30-50: Neutral to negative
- 0-30: Strong risk-off, unfavorable for crypto
| Indicator |
Check |
Source |
| DXY |
Daily close |
TradingView |
| VIX |
Daily close |
CBOE |
| US 10Y yield |
Daily |
FRED |
| S&P 500 |
Daily close |
Yahoo Finance |
| Fed speakers |
Schedule |
Fed calendar |
| Indicator |
Check |
Source |
| CME FedWatch |
Rate probabilities |
CME |
| Global M2 |
YoY change |
MacroMicro |
| Credit spreads |
HY-IG spread |
FRED |
| COT data |
Futures positioning |
CFTC |
| Indicator |
Check |
Source |
| CPI/PPI |
Inflation data |
BLS |
| Employment |
NFP, unemployment |
BLS |
| GDP |
Growth rate |
BEA |
| FOMC statement |
Policy direction |
Fed |
Conditions: - Fed signals rate cuts
- DXY breaking down
- M2 growth accelerating
Crypto action: - Increase exposure
- Focus on high-beta alts
- Extend time horizons
Conditions: - Fed more aggressive than expected
- DXY breaking out
- M2 contracting
Crypto action: - Reduce exposure
- Move to stables
- Tighten stops on remaining positions
Conditions: - Inflation persisting
- Growth slowing
- Fed in difficult position
Crypto action: - Mixed—BTC may benefit as inflation hedge
- Alts likely suffer
- Focus on quality, reduce leverage
Conditions: - VIX spiking
- Credit spreads blowing out
- Flight to safety
Crypto action: - Defensive positioning
- Cash is a position
- Look for capitulation to buy
One CPI print doesn't change the regime. Look for trends and confirmation.
When Fed is hawkish, don't assume they'll pivot soon. Policy changes slowly.
"This time it's different" usually isn't. Macro still matters, it's just temporarily overwhelmed.
You don't need 50 indicators. DXY + M2 + risk sentiment covers most of what matters.
Use macro to determine:
- Overall bias (bullish/bearish)
- Position sizing (aggressive/defensive)
- Time horizon (longer/shorter)
Use technical to determine:
- Entry points
- Stop levels
- Exit targets
Macro view: DXY weakening, M2 expanding, VIX low → Bullish bias
Technical setup: BTC pulling back to 50 SMA, RSI at 40
- Trade: Long BTC at support, wider stop (macro supporting), larger size (high conviction)
How much should macro influence my trading?
Significant influence on position sizing and overall bias. Less influence on individual trade decisions which remain technical.
What's the most important macro indicator?
Global liquidity (M2) for longer timeframes. DXY for shorter-term correlation.
Does crypto ever decouple from macro?
Temporarily, during crypto-specific narratives (halvings, major adoption news). But macro regains influence, especially during stress.
How far ahead does macro predict crypto?
3-6 months for M2 correlation. Days to weeks for Fed announcements. Real-time for risk sentiment shifts.
