Bitcoin's Recovery Rally Stalls as Fed Meeting Draws to a Close

Bitcoin's (BTC) recovery rally has paused as the closely watched two-day Federal Reserve meeting wraps up Wednesday afternoon. 

The leading cryptocurrency is trading back and forth in the $53,900 to $55,700 range, having charted an impressive bounce from roughly $48,000 over the previous two days. 

The market is struggling to find direction, possibly due to caution ahead of the end of the Fed gathering. Investors will be waiting for the post-meeting statement and to see during the post-meeting press conference if Chairman Jerome Powell drops hints of an early scaling back of stimulus because of fears of mounting inflation. 

Data from the Federal Reserve Bank of St. Louis shows inflation expectations for the second half of the current decade reached a 30-month high of 2.25% on Tuesday. Inflation fears have also spread to the stock market and could soon translate into a higher consumer price index, as per a new report from Bank of America. 

Bitcoin may face selling pressure if the Fed turns hawkish (inclined to raise rates) and signals an early tapering of stimulus. "A tightening stance from the Fed might cause bitcoin to give away the weekly gains," Pankaj Balani, co-founder and CEO of the Singapore-based Delta Exchange, said. 

The Fed has been buying $120 billion worth of bonds under its open-ended asset purchase program since March 2020 to thwart the coronavirus pandemic's negative impact on markets and the economy. The central bank's benchmark interest rate also stands at a record low of 0.25%. 

Financial assets and bitcoin have been significant beneficiaries of this ultra-easy monetary policy. Hence hints of early reversal may bring about a correction in asset prices. 

That said, analysts expect the Fed to maintain its easing (dovish) bias. 

"Rather than follow the lead of the Bank of Canada [BOC], which last week began cutting back on bond purchases and signaled a quicker time frame for the next interest rate increase, the Fed will most likely take an approach similar to the one the European Central Bank conveyed last Thursday. "It will maintain the policy as is, remind markets that it is willing to do even more should downside risks materialize," Mohamed A. El-Erian, chief economic advisor at Allianz, noted in his Bloomberg column.

LMAX Digital's Joel Kruger and Delta Exchange's Balani also foresee the Fed keeping its dovish stance intact. "The Fed should continue with its accommodative stance despite transitory inflationary pressures," Balani said. 

Recent weakness in the dollar index and Treasury yields also points to a low probability of the Fed following BOC's footsteps. 

The dollar index, which gauges the greenback's value against major fiat currencies, has dropped by 2.3% this month despite signs the U.S. economy is accelerating. The 10-year Treasury yield has shed 12 basis points, according to data source TradingView. 

Bitcoin's recovery rally may pick up steam if the Fed maintains its easy-money policy, as is expected. "We don't believe there will be any messaging concerning an earlier taper, and we think bitcoin will continue to be supported in this backdrop," Kruger said. 

Also read: As Powell Heads to Fed Meeting, Inflation Data Can Only Get Worse

However, Stack Funds' Matthew Dibb said he expects price consolidation even if the Fed maintains its current course. "From a technical view, bitcoin is lagging in its recovery since last week, with the majority of alternative cryptocurrencies charting stronger rallies," Dibb said. "We caution traders that we may be stuck in the $50,000 to $60,000 range for the next few weeks."