Bitcoin (BTC) dropped and U.S. stock futures nursed losses as interest rate derivative traders expect the U.S. Federal Reserve could raise rates seven times this year, and the tightening cycle would peak at a level higher than previously anticipated.
- The top cryptocurrency by market value traded 3% lower on the day at $38,300 during the European session, having almost tested the $40,000 mark late Monday, CoinDesk data shows.
- The futures tied to the tech-heavy Nasdaq 100 index traded 0.5% lower, signaling a continued risk aversion. On Monday, the index fell 2%, leading the S&P 500 and Dow Jones lower as investors rotated money into value stocks from growth stocks ahead of an impending Fed rate hike on Wednesday.
- As of Monday, overnight index swaps saw the Fed funds rate, or the benchmark interest rate, at 1.85% after the December meeting. An overnight index swap is an agreement where a fixed rate is swapped against a pre-determined published index of a daily overnight reference rate.
- In other words, with the current effective Fed funds rate at 0.08%, traders expected 175 basis points worth of tightening for 2022. That's equivalent to seven quarterly percentage point (25 basis point) rate hikes. Markets had priced in two of the seven rate hikes, leaving five on the table following Russia's invasion of Ukraine on Feb. 24.
- The renewed hawkish repricing aligns with investment banking giant Goldman Sachs' forecast. It suggests bleak near-term prospects for risk assets, including bitcoin, more so as traders see interest rate peaking around 2.57% in the second half of 2023 – up 50 basis points in one week and 100 basis points this year, according to Reuters.
- Marc Chandler, chief market strategist at Bannockburn Global Forex, said the Fed is likely to raise the forecast for the so-called terminal or peak interest rate to 3% from December's projection of 2.5%.
- The Fed is widely expected to kick off the tightening cycle on Wednesday with a 25 basis point rate hike.
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