This first week of May is very busy in terms of fundamentals with the new rate hikes by the FED and the ECB and the publication on Friday of the NFP report in the United States. The increase in the probability of a US recession leads the market to price a FED pivot from this summer of 2023. What impact can be expected on the Bitcoin (BTC) price trend?
The Federal Reserve could “pivot” in the course of the summer
The Federal Reserve of the United States (The FED) issued a new monetary policy decision on Wednesday evening and its president Jerome Powell a press conference. As expected by the consensus of financial analysts, the FED increased its key rate by 25 bps to reach the rate of 5.25%, thus exceeding the record for the year 2007!
Jérôme Powell insisted on the fact that inflation (in particular underlying inflation) was far from being defeated and that monetary policy could remain restrictive for many more months.
Very surprisingly, the market seems to no longer believe the FED and is now projecting a downward inversion of the FED’s interest rate cycle. Clearly this is what is called a downward pivot in the Fed’s rates. According to the CME FED WATCH TOOL (see table below), the market anticipates that the FED’s terminal rate has now been reached and that the latter should make its pivot during the summer; it is indeed the teaching of the price of futures contracts traded on the Chicago stock exchange on the interest rate of the Fed funds.
It is obvious that such a scenario of the end of restrictive monetary policy is a fundamental factor of support for so-called risky assets on the stock market, in particular the equity market and the crypto market.
How can such optimism in market expectations be explained against the official rhetoric of the FED?
First of all, there is the increase in the probability of a US recession with the growing difficulties of US regional banks, and above all the market’s conviction that disinflation will continue (recent drop in the oil price in particular ).
We must still remain cautious, because the FED will not pivot as long as underlying inflation remains at a high level.
Table taken from the CME FED WATCH TOOL of the Chicago Stock Exchange, which describes the probabilities of the evolution of the interest rate cycle of the Federal Reserve of the United States (FED)
The trend of Bitcoin (BTC) remains under the strong influence of the trend of the pair interest rate / US dollar
Now let’s do a bit of foresight and imagine that market expectations are correct. In this prospective scenario, the FED would therefore initiate a downward trend in its interest rates from the end of the coming summer, acting downwards on market interest rates and the dynamics of the US dollar. against a basket of major currencies.
The chart below reminds you of the strong inverse correlation between Bitcoin and the US dollar/interest rate pair, so if market expectations hold true, it would be a great help for the crypto market to continue its bullish recovery initiated at the beginning of the year.
Finally, on the chartist level, the uptrend of the year remains active as long as the price of Bitcoin preserves the support of 25,000 dollars.
Graph showing bitcoin price in weekly Japanese candles (arithmetic scale) with US interest rates and US dollar trend in Forex
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