First Mover Americas: Bitcoin Down as Market Braces for Fed’s 50 Basis Point Rate Hike

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Bitcoin traded lower early Friday and appeared on track to end April with a 12% monthly loss as the weak tone in equity markets and caution ahead of next week’s Federal Reserve meeting overshadowed positive news flow.

The biggest cryptocurrency by market value slipped below $39,000 after facing rejection above $40,000 on Thursday.

The decline came even as investment banking giant Goldman Sachs announced its first bitcoin-backed lending facility in a sign of increasing crypto adoption on Wall Street. Further, China’s Politburo pledged economic support offering a lifeline to risk assets.

U.S. stock futures slipped, led by losses in technology shares after Amazon reported its first quarterly loss in seven years.

The Fed is likely to raise the benchmark interest rate by 50 basis points (half-percentage point) next week, accelerating the pace of monetary tightening that began last month with a 25 basis point hike. The central bank is also expected to start the process of shrinking its nearly $9 trillion balance sheet next week. Thanks to the record money printing to cushion the economy and markets from the coronavirus pandemic, the balance sheet has more than doubled in two years.

Policy tightening is widely considered bearish for risk assets, including bitcoin (BTC).

“The Fed’s response to COVID increased the money supply by over 40%, directly providing stimulus checks and indirectly growing capital reserves through quantitative easing,” IntoTheBlock’s research head Lucas Outumuro said. “Now that the ‘money printer’ is expected to slow down, markets have been anticipating a hangover from the excessive stimulus provided, weighing down on valuations of both stocks and crypto.”

Rate hike priced-in?

The fed funds futures showed a 50 basis point hike in the benchmark interest rate is pretty much a done deal for the Fed’s upcoming policy meeting on May 3-4.

Bitcoin has remained under pressure throughout the month despite bullish crypto news. The tech-heavy Nasdaq index has dropped over 8% this month. The dollar index, which tracks the greenback’s value against major currencies, has rallied to 20-year highs.

In other words, various corners of the financial market appear to have priced in the impending 50 basis point hike and balance sheet runoff announcement. Besides, Federal Reserve Chairman Jerome Powell recently put bigger rate hikes on the table, preparing markets for an eventual move.

So, risk assets could bounce back post-Fed meeting in a classic sell the rumor, buy the fact trade.

“The market was already expecting a 50-basis point rate hike before Jerome Powell’s announcement last week, so this news has already been priced in to a large extent,” said Marcus Sotiriou, analyst at the U.K.-based digital asset broker GlobalBlock.”This could lead to a buy-the-fact event on the day of the FOMC meeting on 3rd-4th May.”

Joe Haggenmiller, head of markets at leading crypto finance firm XBTO Group, said bitcoin’s recent resilience to continued macro uncertainty might fade if the Fed delivers a bigger-than-expected rate hike.

Focus on the dollar

The post-Fed uptick in bitcoin, if any, should be viewed with caution if the dollar continues to rise. That’s because the inverse correlation between the two has strengthened in recent weeks.

By Omkar Godbole

While bitcoin remains comfortably above the mid-2021 low, the ratio of Nasdaq to S&P 500, which measures the tech cycle or technology stocks’ performance relative to the broader market, has dipped below its May 2021 low, confirming a double top breakdown.

The bearish pattern suggests tough days ahead for technology stocks. Bitcoin has closely followed the tech cycle in the past.

Today’s newsletter was edited by Omkar Godbole and produced by Parikshit Mishra and Stephen Alpher.