The U.S. Federal Reserve (Fed) is set to announce its interest rate decision on Wednesday and the question is not whether it will hike the benchmark borrowing cost by 25 basis points (bps), but whether the increase will mark the end of a tightening cycle that began 16 months ago and was partly responsible for last year's crypto market crash.
The Fed is expected to raise the rate to a 22-year high of 5.25%-5.5%, with Chairman Jerome Powell holding a press conference half an hour after the 18:00 UTC (14:00 ET) announcement.
"Looking at the Fed’s Summary of Economic Projections (SEP) from June, the median forecast among Fed officials indicated two more 25 bp hikes would occur by year-end, but markets haven’t fully bought into this view and continue to imply that one hike (~65%) is more likely than two (~27%)," Matt Kunke, a research analyst at crypto trading firm and liquidity provider GSR told CoinDesk.
"Our year-end base case remains aligned with the SEP forecasts and anticipates another hike will follow this year due to the sustained persistence of inflation as measured by Core PCE, which is the Fed’s preferred inflation gauge," Kunke said.
It's not just crypto. Bank of America expects the Fed to raise rates in September.
"We continue to expect a second 25bp hike in Sept, but action beyond July remains highly data dependent, both in terms of the timing of hikes and whether they happen," Bank of America's FX global research team said in a note to clients on Friday.
Since the June's Fed meeting stocks have surged and investors have trimmed expectations of more tightening, taking note of continued labor market resilience and dwindling inflation and have grown more confident of a soft landing for the economy. Bitcoin has rallied 16%, largely on the back of spot-ETF optimism and partly aided by the 'goldilocks' economic scenario.
That means suggestions of more rate hikes beyond July may see investors take some risk off the table, putting downward pressure on risk assets, including cryptocurrencies.
"A 25 bps interest rate hike is fully expected by the market, but we will be watching the language in the FOMC statement and the subsequent Powell press conference, where a hawkish tone leaving the doors open to a further rate hike this year may put further downward pressure on markets," Dick Lo, the founder and CEO of quant-driven crypto trading firm TDX Strategies, said.
Correlations change fast
It's possible that the Fed's communique and Wall Street sentiment do not matter as much to bitcoin: The cryptocurrency's correlation to stocks has weakened in the past 90 days.
However, correlations are backward-looking indicators and can change fast. Besides, bitcoin's bullish momentum, strengthened by BlackRock's ETF filing on June 15, has weakened of late, with the likes of JPMorgan saying any approval is unlikely to be a game changer for the crypto market. On Monday, the cryptocurrency fell over 3%, diving out of its Bollinger bands to signal a potential volatility explosion to the downside.
That means, crypto traders may be better off paying attention to what the Fed says and how traditional markets react.
"I'm looking into what tone the Fed will set for the next meetings in September and beyond. We are at an intriguing juncture, as inflation has been receding, but the favorable base effects will be less pronounced from here on. Additionally, the oil price bounced back about 10% over the past few weeks," David Lawant, head of research at institutional crypto derivatives platform FalconX, said in an email, hinting at the scope for a hawkish Fed talk.
Lawant said the current crypto market action is reminiscent of 2019, marked by excitement within the crypto industry and some apathy from the broader market.
"I'm expecting the [crypto] market to move along with risk assets more broadly," Lawant said.
Tim Frost, CEO of digital wealth platform Yield App warned it may be too early to celebrate the crypto bull market.
"If Powell’s speech is particularly hawkish, or later minutes reveal sustained or increased hawkish sentiment, this will likely kneecap the crypto rally we saw last week," Frost said. "With recent rulings from the SEC regarding Binance, Coinbase, and then Ripple’s partial victory over the regulator providing some certainty, many have already begun celebrating the beginning of a bull market. It is, though, too early to pop the champagne."
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