The Bitcoin (BTC) price is hovering close to $26,000, well within its recent intra-day ranges in the lead-up to Wednesday’s key US Federal Reserve policy announcement.
The US central bank is expected to pause its cycle of aggressive interest rate hikes that began last March and have seen the bank lift rates by 500 bps (to 5.0-5.25%) in the last 10 meetings.
The Fed will also release updated economic projections and a new “dot plot” alongside the usual policy statement and post-meeting press conference with Fed Chair Jerome Powell.
The dot plot is a summary of forecasts from Fed policymakers as to where they think interest rates will be in the coming years.
Given the two additional forward-looking components that detail Fed policymakers’ expectations about the economic and monetary policy outlook, Wednesday’s meeting is being touted as having the potential to trigger significant volatility in crypto markets.
Bitcoin has been trending lower since mid-April’s yearly highs in the $31,000s, weighed recently by 1) markets pulling back on rate cuts bets for the second half of 2023 and, more recently, 2) uncertainty regarding the US regulatory outlook as the US Securities and Exchange Commission (SEC) takes action against Coinbase and Binance.
A Hawkish Pause to Weigh on Bitcoin?
And many analysts expect Wednesday’s Fed meeting to be a “hawkish pause”, which could worsen bitcoin’s short-term headwinds.
While the Fed is expected to leave rates unchanged, the bank is expected to leave the door open to further rate hikes, which could bolster expectations for a July hike (which is already the market’s base case).
The CME’s Fed Watch Tool currently prices around a 65% of 25 bps (or more) worth of rate hikes by July.
Meanwhile, the economic projections are likely to show that the Fed expects inflationary pressures to remain sticky at levels way about the Fed’s 2.0% goal for some time, meaning the dot plot is unlikely to signal near-term rate hikes.
That could encourage markets to further pull back on rate-cut bets for the end of 2023.
While Tuesday’s softer-than-expected headline Consumer Price Index (CPI) inflation reading supported the case for a pause, analysts interpreted the still-hot core CPI readings as supportive of the idea of “higher for longer” in interest rates.
According to the CME’s Fed Watch Tool, money market pricing still implies about a 22% chance of at least 25 bps worth of rate cuts from current levels by the year’s end.
A further pricing out of rate cuts expectations for 2023 could lift US yields even further after the 2-year already hit its highest since mid-March around 4.7% on Tuesday.
That could support the buck, and weigh on yield-sensitive assets like gold and bitcoin.
Both gold and bitcoin are non-yielding assets.
That means when yields rise, the opportunity cost of owning bitcoin goes up, lowering its perceived valuation and encouraging selling.
Bitcoin to Sub-$25,000 Levels Soon?
Despite recent upside in yields and uncertainty as a result of SEC’s action to take on major players in the US crypto industry, bitcoin continues to hold above long-term resistance-turned-support in the $25,200-400 area.
The uptrend from late 2022 to 2023 also comes into play as support in the mid-$25,000s.
But in the last few months, bitcoin has been trending lower within the confines of a bearish trend channel and is not below its 21, 50 and 100-Day Moving Averages, implying the cryptocurrency still carries significant bearish momentum.
Adding to the woes is the fact that widely followed version of the Moving Average Convergence Divergence (which looks at the divergence between the 12 and 26-Week Moving Averages) just sent a strong sell signal.
Many think that bitcoin could soon be headed lower, with some bears setting their sights on the 200DMA around $23,700.
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