Crypto Observers Believe Bitcoin:- Bitcoin, the world’s biggest cryptocurrency by market value, has seen a resurgence this year, with the price rising 70% since Jan. 1. The cryptocurrency closely tracks U.S. dollar liquidity metrics, making it a macro asset that investors should watch closely.
Possible roadblock for the rally if Federal Reserve Chair Jerome Powell does not signal a pause to the tightening cycle on Wednesday, according to some observers.
What will the Fed do on Wednesday?
This is the question on everyone’s mind as the Federal Reserve makes its latest interest rate decision at 2 p.m. ET.
Some believe that the Fed will raise rates one final time by 25 basis points to the 5%-5.25% range, putting an end to the so-called tightening cycle that has roiled cryptocurrencies over the past year.
Others believe that the Fed may start cutting rates as early as July, based on the CME FedWatch tool. This could have a major impact on the crypto market, which has been in a slump for the past few months.
We will have to wait and see what the Fed decides on Wednesday. However, whatever happens, it is sure to have a major impact on the crypto market.
As multiple uncertainties have recently arisen, dovish expectations have strengthened among investors. These uncertainties include the debt ceiling, recession fears, crisis at regional banks and bearish speculative fervor in banking stocks.
After the aggressive pricing of pause and rate cuts, Powell needs to confirm the same during his presser, or else the Treasury yields and the U.S. dollar (USD) may bounce. This could lead to an uptick in yields and the dollar, which has historically been bearish for bitcoin.
“The market is expecting a pause after this hike, so we’ll be looking for the sentence on ‘additional policy firming may be appropriate’ to be removed from the statement, replaced by more open-ended language leaving the door open for either more rate hikes or a pause, depending on the data,” Dick Lo, the founder and CEO of quant-driven crypto trading firm TDX Strategies, told CoinDesk.
“We’re not sure if Chair Powell will be definitive when it comes to a pause,” Lo said, “which may disappoint the market.”
Markets have seen an incredibly risk-on action since October 2022, mainly anticipating a dovish Fed pivot. The dollar index, which gauges the greenback’s value against major fiat currencies, has declined by over 14% since early October. Meanwhile, Wall Street’s tech-heavy Nasdaq index and bitcoin have rallied 25% and 50% over the same period.
“The lack of conviction from Powell in signaling the pivot may disappoint markets, as Lo warned, triggering a recovery in the greenback.”
Chris Weston, head of research at foreign-exchange brokerage Pepperstone, voiced a similar opinion on Twitter, saying that the lack of conviction from Powell may disappoint markets and trigger a recovery in the greenback.
“The Fed’s recent policy announcements suggest that they may be gearing up for a rate hike this summer. If this is the case, bank equity may be due for a rebound. After all, nothing is priced in for June and the cuts likely won’t start until July. So, if the Fed offers a ‘lazy tightening bias’ (meaning that they will only raise rates if the data warrants it), then the risk is skewed on the hawkish side.”
Weston commented that the pre-Fed dovish pricing is similar to the setup seen before the Reserve Bank of Australia’s recent rate decision. The RBA on Monday lifted rates by 25 basis points and warned of more tightening ahead, contradicting expectations for a continued pause and eventual easing later this year. The hawkish surprise prompted the Aussie dollar to surge across the board.
According to Weston, the post-meeting bounce in yields and the dollar, if any, could add to banking sector woes and will likely be short-lived. Bitcoin has performed positively during the recent banking turmoil, strengthening its safe-haven appeal. This could be a sign that investors are starting to see Bitcoin as a viable alternative to traditional assets in times of market uncertainty.
“I would assume this initial move higher in the USD would be short-lived,” Weston noted, “as any decent spike in bond yields would see bank equity take another leg lower and traders would simply reapply USD and crude shorts and buy gold and JPY as a hedge.”
However, some observers do not foresee a sustained dollar rally, irrespective of what Powell says at the post-meeting press conference.
Markus Thielen, head of research and strategy at Matrixport, believes that the U.S. dollar is unlikely to rally here. This is because expectations for an eventual dovish pivot by the Fed will be kept alive – no matter if the Fed hikes again or signals another hike.
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The stress in the banking sector is deflationary and energy costs have declined materially, according to Thielen. The Fed is also seeing progress in their request for a higher unemployment rate, providing comfort that rate hikes are coming to an end. This should cause Bitcoin to rally on a dovish pivot.