Key Week for Bitcoin and the Dollar Index

• Tuesday's U.S. manufacturing data is likely to show continued contraction, signaling weakness in the dollar index and strength in bitcoin.
• Traders should watch out for an August-like growth scare in risk assets.
• Friday's U.S. jobs data could extend the dollar weakness, according to ING.

Bitcoin BTC$111,352.12, the leading cryptocurrency by market value, fell over 10% in the seven days to Sept. 1, reversing the preceding week's price bounce as the decline in the dollar index stalled.

The slew of U.S. economic data due this week will likely determine whether the dollar resumes the two-month weakening trend, offering a tailwind for risk assets, including cryptocurrencies.

The economic releases start Tuesday with the Institute of Supply Management's (ISM) manufacturing purchasing managers' index (PMI) for August. According to ForexLive, the consensus is that the index will rise to 47.5 from July's 46.8, which signaled the sharpest contraction in factory activity since November 2023.

A weak reading will strengthen the case for the Federal Reserve to cut interest rates, sending the dollar lower and boosting demand for riskier assets. Interest-rate markets are already pricing a 70% chance of a 25 basis point cut and a 30% chance of a 50 basis point cut in September, according to CME's FedWatch tool.

"Rate cuts are good for BTC, as it is particularly sensitive to monetary liquidity conditions (seen as a risk asset, with no cash flow or margins to get hit in a slowdown)," Noelle Acheson, author of the popular Crypto Is Macro Now newsletter, said in last week's edition.

"A weaker U.S. dollar is good for BTC, as it tends to boost monetary liquidity by lowering the cost of capital. Plus, expectations of continued dollar weakness highlight the utility of a dollar hedge and should boost spending power (and hedge interest) in other jurisdictions. And, the dollar is the denominator of the most-quoted pair (BTC/USD)," Acheson wrote.

That said, July's weaker-than-expected ISM PMI, released Aug. 1, triggered recession fears, weighing on risk assets even as the dollar dropped. BTC fell 3.7% to $62,300 that day. Traders, therefore, should watch out for a "growth scare" should the PMI come in worse than expected.

"This is a key metric as risk assets moved sharply lower the last time," Markus Thielen, founder of 10x Research, said in a weekly preview note.

Nonfarm payrolls due Friday

ForexLive analyst Giuseppe Dellamotta's weekly preview note echoed the sentiment. "The main culprit might have been the employment sub-index falling to a new 4-year low ahead of the NFP report, which eventually triggered another wave of selling [in risk assets] as it came out weaker than expected across the board," Dellamotta said, referring to the U.S. nonfarm payrolls release.

Later this week, the focus will shift to the JOLTS job opening data, due Wednesday, ISM services PMI, ADP and weekly jobless claims on Thursday, and the main event of the week – the August nonfarm payrolls (NFP) report on Friday.

"If the consensus is right about Friday's jobs report (165,000 job gains and a drop in the unemployment rate back to 4.2%), then market pricing will firm up just a 25bp cut as the start to the Fed easing cycle on 18 September," analysts at ING said in Monday's morning note.

However, according to ING's U.S. economists, the payrolls could show additions of just 125,000 and an uptick in the jobless rate to 4.4%, resulting in a continued drop in the U.S. dollar.

From a technical analysis view point, BTC is on the defensive ahead of the key data releases, with indicators like the MACD histogram pointing to a strengthening of the downside momentum.

"Technical indicators suggest that the bearish momentum may persist," Valentin Fournier, an analyst at research firm BRN, said in an email. "The MACD is showing increasingly negative momentum, while the RSI is at a neutral level. The lower band of the Bollinger Bands remains around $56,000, indicating potential further declines toward this level."