Today’s interest rate decision by the US Federal Reserve (Fed) and the subsequent Federal Open Market Committee (FOMC) press conference could make up for what has been the most important day for Bitcoin price so far this year.
In March, the Fed had raised its benchmark rate by an additional 0.25 basis points (bps). At that point, central bankers left their next moves open. Fed Chair Jerome Powell clarified that further rate hikes “may be appropriate” and that the decision “will be data dependent”.
25 basis points expected despite strong headwinds
Most recently, the consumer price index (CPI) surprised positively with a year-on-year decline from 6.0% to 5.0%, but core inflation appears to be very persistent. Nevertheless, the market expects today’s rate hike of 0.25 basis point to be the last in this cycle.
According to the CME’s FedWatch tool, 89% of market participants believe the Fed will make this move today, despite strong headwinds from US policy yesterday. Democratic-led members of Congress called on the Fed to pause rate hikes.
Ten Senators and Representatives, led by Senator Elizabeth Warren, expressed expressed concern about the Fed’s monetary policy strategy in a letter to Fed Chairman Jerome Powell on Monday, urging avoidance of “a recession that kills jobs and crushes small businesses.”
Another argument against continued aggressive policy is the fact that the fastest cycle of rate hikes in Fed history has created deep cracks in the US banking system. After the fall of Silicon Valley Bank, Signature Bank and First Republic Bank, numerous other regional US banks plunged deep into negative territory yesterday.
US regional bank stocks this year:
1. Home Street, $HMST: -75%
2. Pac West, $PACW: -71%
3. Metropolitan Bank, $MCB: -64%
4. Zion’s Bank, $ZION: -51%
5. Western Alliance, $WAL: -47%
6.Keycorp, $KEY: -45%
7. HavenOne, $HONE: -39%
8. National Valley, $VLY: -35%
9.Trust, $TFC: -33%…— The Kobeissi Letter (@KobeissiLetter) May 2, 2023
In addition, the recent collapse of First Republic Bank exacerbates the credit crunch: a drop in bank lending due to a sudden tightening of bank deposits. If AP reported Yesterday, half of the 4,800 US banks had assets worth less than liabilities.
‘It’s creepy. Thousands of banks are under water,” says Professor Amit Seru, banking expert at Stanford University. “We shouldn’t pretend that this is just about Silicon Valley Bank and First Republic. Much of the US banking system may be insolvent.”
That’s another reason why the market keeps calling Powell’s bluff. According to CME FedWatch, the market believes that the Fed will not only pause after today’s meeting, but also cut rates twice this year – unlike the Fed, which predicts a final interest rate of 5.0% in its latest dot plot by the end of the year.
Bitcoin analysis: how to prepare
A rate hike of 25 basis points has already been priced in by the market and is not expected to depress Bitcoin’s price. When the interest rate decision is announced at 2pm EST (8pm CET), no major volatility is to be expected, which will come with the press conference. The only exception is a big surprise: an early break. However, this scenario seems extremely unlikely.
This will put all eyes on the FOMC press conference at 2:30 pm EST (8:30 pm CET). Probably Powell’s most important statement will be whether the Fed will pause interest rates in June. If so, the Bitcoin market is expected to immediately respond bullish. If Powell denies this statement or states that it depends on the data, that would be bearish.
Another focus will be on the issue of rate cuts later this year. Especially if Powell emphasizes that the Fed will keep rates high until 2024, that would be quite bearish for Bitcoin. The question will be whether Powell or the market is wrong, and who will fold first.
Other important statements are expected on the US banking crisis and expectations of a soft landing (recession). Both topics have the potential to move the Bitcoin price.
Meanwhile, traders should be careful with the first move as it often goes in the wrong direction initially. As analyst Ted (@tedtalksmacro) explained, hedges typically settle shortly after being announced. Usually there is a short up/down impulse as these positions unwind, then a “real” move occurs when the positions are bought back, which then causes the price to fall/rise again.
Once short-term interest is removed, the spot market takes control of the actual move. “Here you want to monitor what CVDs are doing on the spot, and whether it is different from how offenders move around. […] after the press conference we should be able to assess things more clearly as the hedges are settled”, advises Ted.
At the time of writing, Bitcoin’s price was at $28,623.
Featured image from iStock, chart from TradingView.com