Bitcoin Tops $27K a Week After Death Cross Formation With Fed Likely to Extend Rate Pause

Bitcoin advanced Monday as U.S. rates traders penciled in greater odds of the Federal Reserve keeping borrowing costs unchanged later this week and through the rest of the year.

The leading cryptocurrency by market value jumped to $27,220, the highest since Aug. 31, having climbed almost 8% since the ominous-sounding death cross pattern appeared on its daily price chart a week ago. The advance since that bearish crossover of the 50-day simple moving average (SMA) below the 200-day moving average reinforces the measure's reputation as an unreliable standalone indicator.

The bounce comes as Fed funds futures indicate a 99% probability the U.S. central bank will leave rates unchanged between 5.25% and 5.5% this Wednesday. The futures also show a 69% chance of no action in November and a 58% probability of the same in December. The central bank has raised rates by 525 basis points since March 2022 to tame inflation, a so-called liquidity tightening that's seen as partly responsible for the past year's crypto crash.

"No one really expects a change in the policy rate or balance sheet guidance at this meeting," Scotiabank said in a preview note to clients on Friday. "Instead, it will focus upon tweaks to forward guidance on the policy rate, updated macroeconomic projections and guidance that [Fed Chair Jerome] Powell provides. This one is likely to be about buying time."

The Fed will deliver a policy decision on Wednesday at 14:00 ET accompanied by a statement and full forecast update in the Summary of Economic Projections, including a new "dot plot" of interest-rate estimates. Powell will follow with a press conference thirty minutes later.

Scotiabank said the dot plot is likely to keep the door open for one more rate hike before the end of the year, considering the potential for a rebound in inflation and markets' tendency to jump the gun in pricing renewed liquidity easing.

"The FOMC is likely fully aware of the fact that there have been three prior inflation soft patches during the pandemic that were subsequently followed by a reacceleration of inflationary pressures," Scotiabank wrote, referring to the Federal Open Markets Committee.

"Another reason is to manage markets because the minute the FOMC signals conviction that hikes are definitely done is when traders with their itchy fingers pounce on the front-end and start pricing amplified easing bets. Now is likely too soon for the FOMC to consider such a move," the team added.

Analysts at ING do not expect the Fed to carry through with the final forecast hike. It's possible this bounce in bitcoin stems from the belief the Fed's tightening cycle is over. The cryptocurrency is widely considered a pure play on liquidity and is more sensitive to changes in interest-rate expectations than equities are.

According to ING, "the greater risk might be the Fed scaling down its dot plot median forecast of a 100 basis points easing cycle in 2024."

A hawkish scenario might put a bid under the greenback and stall the bitcoin's bounce.