Bitcoin rally could stall if Powell shows no signs of pausing tightening

Bitcoin, the world’s largest cryptocurrency by market capitalization and a macro asset that closely tracks the U.S. dollar’s liquidity index, has been on a recovery this year, with its price up 70 percent since Jan. 1.

Some observers believe the rally could face a temporary hiccup if Federal Reserve Chairman Jerome Powell fails to signal on Wednesday that the much-anticipated tightening cycle is on hold.

The Federal Reserve will announce its interest rate decision at 01:00 (Vietnam time) on Thursday. Thirty minutes later, Powell will speak at the post-meeting news conference. Fed funds futures showed traders expected the Fed to hike rates one last quarter point to a range of 5-5.25%, ending a tightening cycle that roiled money markets last year. Also, traders are pricing in rate cuts starting in July.

Dovish expectations have been strengthened with the recent increase in uncertainty in the form of debt ceiling, recession fears, regional banking crises and bearish speculative sentiment on bank stocks.

A strong pricing bias for pauses and rate cuts means Powell needs to confirm this at a press conference. Otherwise, U.S. Treasury yields and the dollar could rise again. Yields and a rising dollar have historically been negative for Bitcoin.

“As markets anticipate a pause following this rally, we will seek to remove ‘additional policy consolidation as may be appropriate’ from the statement and replace it with more open language, leaving the door open to the possibility of a rate hike or a pause in the possibility of a rate hike, That is data dependent. We think Chairman Powell may be afraid to make a definitive decision on a pause, which could disappoint the market,” said Dick Lo, founder and CEO of cryptocurrency trading firm TDX Strategies.

Markets have seen classic risk-on action since October 2022, largely in anticipation of dovish Fed policy. The U.S. dollar index, which measures the greenback’s value against major fiat currencies, has fallen more than 14% since early October. Meanwhile, Wall Street’s tech-heavy Nasdaq and Bitcoin are up 25% and 50%, respectively, over the same period.

So, as Lo warned, a lack of confidence that Powell is signaling a change of heart could disappoint markets, sparking a dollar rally.

Chris Weston, head of research at forex broker Pepperstone, also noted View The same goes for Twitter.

“Bank stocks will definitely take a hit, but with nothing moving in prices in June and July starting to cut, if the Fed delivers a lazy (data-dependent) tightening bias), then they think the risk is skewed hawkish,” Weston said.


Traders predict Fed rate cuts starting in July (Fed Funds Futures) | Source: Pepperstone

According to Weston, the Fed’s previous dovish valuations are similar to what was foreseen in the recent Reserve Bank of Australia (RBA) interest rate decision. On Monday, the Reserve Bank of Australia raised interest rates by 25 basis points and warned of further tightening, in stark contrast to expectations for a continued pause and eventual easing of policy later this year. Immediately afterwards, the Australian dollar soared across the board.

A rebound in yields and the dollar after the meeting (if any) will add to difficulties for the banking sector, and is likely to be short-lived. Bitcoin has been active in the recent banking crisis, boosting its safe-haven appeal.

“I think this initial move (higher dollar) will be short-lived as any spike in bond yields will send bank stocks down again and investors traders will simply reapply their dollar and crude short positions and buy gold and the yen as a hedge,” Weston said. notes.

However, no matter what Powell says in his post-meeting press conference, some observers don’t think the greenback will sustain its gains.

Markus Thielen, head of research and strategy at the crypto service provider, said:

“The dollar is unlikely to rally here as expectations for an eventual Fed dovish policy persist – regardless of whether the Fed raises rates again or signals another rally.

The stressors are deflation in the banking sector and sharp declines in energy costs. The Fed has also seen progress in their advocacy for higher unemployment, which should provide some comfort to expectations of near-term rate hikes. Bitcoin could rise as the Fed turns dovish. “

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According to Coindesk

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