Next Wednesday, December 13, 2023, the Fed will announce its new monetary policy decision regarding interest rates and in the meantime the price of Bitcoin has risen above $41,000.
Indeed, in the past few weeks market expectations on this matter have definitely changed.
Summary
Fed: interest rate cut and prospects of Bitcoin price above $41,000
Until a few weeks ago, markets believed that a further increase in interest rates in the USA was possible between December and January.
Instead, for a few days now, this probability has dropped almost to zero.
In other words, the markets now consider the chances of the Fed being forced to raise interest rates further, already at their highest level in several decades, to be absolutely negligible. In fact, they are beginning to forecast, and perhaps even price in, the start of a rate-cutting campaign.
Until a few weeks ago, it was believed to be possible, although not very likely, for the cuts to begin in June 2024, while now there would even be a 14% probability that the first cut will occur as early as the end of January.
In February, the Fed will not make any decisions, and the markets are now convinced that on March 20th they will start cutting them.
In other words, while a rate cut in January is already considered unlikely, a 25 basis point cut in March is instead considered definitely probable, even three months in advance compared to what was believed just a few weeks ago.
Furthermore, they predict that by the end of 2024 interest rates will have dropped to 4.25%, from the current 5.5%.
This change in perspective has already been priced in, and it is possible that it is one of the main causes of the recent rally in the price of Bitcoin.
Bitfinex analysis
In the latest issue of the Bitfinex Alpha weekly report, number 83, analysts from the crypto exchange argue that the rise in the price of Bitcoin above $41,000, reaching a new 21-month high, has been fueled by the hope that Federal Reserve Chairman Jerome Powell will reinforce optimism about the possibility of a rate cut in early 2024.
It should be noted that often the actual monetary policy decisions of the Fed are anticipated by the markets and therefore priced in advance, while it is mainly the prospects that emerge from the words of its president that generate volatility.
Wednesday 13th will presumably not be the announcement that monetary policy on interest rates remains unchanged to move the markets, as this possibility has already been widely priced in, but what President Powell will say in the following press conference.
In particular, investors and speculators will try to understand from his words if a rate cut is possible already in January, or if we will have to wait until March (or May).
In addition, Bitfinex analysts also point out that the recent Bitcoin rally came after asset managers opened long positions worth $1 billion since October, and while futures markets are sending strong bullish signals.
The price of Bitcoin (USD) awaits the decisions of the Fed
In reality, the price of Bitcoin has been on the move since September, when the hope spread that the SEC would approve BlackRock’s request for a Bitcoin spot ETF. Only in November, the rise was supported by growing expectations that the Fed would start a campaign of interest rate cuts in the first half of next year.
The first timid movement to try to rise above the level of lateralization that had effectively held for many months (27,000 USD) actually occurred on September 28th, although it had to wait until October 20th before the real rally began, which is still ongoing.
The 30,000 USD mark was surpassed three days later, and the 35,000 USD mark on November 2nd. The 40,000 USD mark, in fact, was surpassed yesterday.
However, according to Bitfinex analysts, there are also some signals indicating that this rally could exhaust itself. In particular, there are emerging signs that the US economy is still decidedly strong, and this would increase the possibility that the Fed may be forced to postpone the start of rate cuts.
The comment
A Bitfinex analyst commented as follows:
“This upward movement can be attributed to a combination of factors. In particular, there has been significant buying activity in the market, aimed specifically at absorbing the supply above $37,500, near the upper limit of its recent trading range. On December 1st, BTC was still below the maximum range.”
The cumulative volume delta (CVD) for the futures market, which measures the medium and long-term buying and selling pressure of BTC by comparing the volume of buying and selling over time, has been found to be more resilient to downturns in shorter time intervals compared to the CVD for spot markets.
As a result, the market was in a state of “perp premium”, which implies a high relative difference in the demand for BTC in the futures market compared to the spot markets. Although this can be seen as a cautionary signal in other contexts, as increased leverage in markets is not always healthy, what is noteworthy is that, at the same time, open interest has decreased.
While financial markets are now inclined towards a potential interest rate cut by the Fed, with the CME’s FedWatch Tool indicating a 78% probability of such a move by the end of the May 2024 meeting. This is a significant change from just a month ago, when the probability was set at 41%.
Investors currently believe that the Fed will pause its rate hikes, considering its current policy sufficiently restrictive to moderate growth and stabilize prices without triggering a recession.
This delicate balance is crucial for the US economy as it navigates uncertain economic conditions.”
