Crypto Markets Trim Losses, US Dollar Rises as Traders Digest Fed Statement

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Source: AdobeStock / SecondSide

 

Major cryptoassets including bitcoin (BTC) and ethereum (ETH) trimmed some of their losses from the aftermath of yesterday’s US Federal Reserve statement, with prices rising during the European trading hours on Thursday. Meanwhile, the US dollar extended a rally from earlier, breaking through key resistance levels on the way up.

At 14:48 UTC, BTC stood at USD 37,029, down 3.2% for the past 24 hours and 11.3% for the week. At the same time, ETH traded at USD 2,504, down 5% for the day and 19% for the past 7 days.

BTC price over the last 14 days:

Source: CoinGecko

ETH price over the last 14 days:

Source: CoinGecko

Meanwhile, the US dollar index (DXY) continued to rise strongly today, after also seeing strong gains yesterday. The index, which measures the US dollar against a basket of currencies from other major economies, broke through recent highs from November last year, reaching its highest level since July 2020.

US dollar index (DXY):

Source: TradingView

The moves in crypto and forex markets today come after the Fed’s Federal Open Market Committee (FOMC) statement was released yesterday, with the US central bank confirming that it is still committed to its plan to raise interest rates starting in March, as well as to begin work to reduce its massive balance sheet and get the currently high inflation under control.

“The balance sheet is substantially larger than it needs to be and there’s a substantial amount of shrinkage that needs to be done,” Fed Chair Jerome Powell said during a press conference following the release of the FOMC statement.

And while yesterday’s statement was largely in line with the Fed’s earlier ones, the speculations about whether the central bank might raise rates by 0.5% instead of 0.25% in March have remained. The speculations come mainly from analysts who argue that controlling inflation is now more important for the Fed than supporting financial markets.

“Importantly, the Fed’s chair neither confirmed nor discounted the possibility of raising rates by 50 basis points instead of 25, meaning that we could see .50 hikes this year,” Mikkel Morch, Executive Director and Risk Management at crypto hedge fund ARK36, said in the comments shared with Cryptonews.com.

Morch added that he believes this means the Fed is willing to let stocks go lower as it pursues its mandate of keeping inflation under control. And with stocks going down, crypto is likely to go down too, Morch argued.

Digital assets, BTC included, “tend to become more correlated with stocks during stress periods when most of the investment markets go risk-off,” Morch said. It is therefore not surprising, he added, that crypto “moved almost in tandem” with stocks during and after yesterday’s press conference with the Fed Chair Jerome Powell.

The opinion that bitcoin is correlated with stocks was also shared by Zach Pandl, co-head of foreign exchange strategy at the US investment banking giant Goldman Sachs, who told the Financial Times today that bitcoin has seen its correlation with other macro assets increase since the onset of the COVID-19 pandemic.

“Prior to the pandemic, bitcoin and other digital assets showed low correlations to traditional financial market variables — in effect, crypto behaved as an entirely different ecosystem,” Pandl said, adding that correlation with macro assets has picked up over the last two years.

Commenting on Twitter yesterday, popular economist and crypto trader Alex Krüger called the FOMC statement “dovish relative to expectations,” although Powell’s press conference appeared “very hawkish.”

He added that charts no longer look bullish, and with both “a bottom and a top in place,” rangebound prices can be expected going forward.

Meanwhile, Eric Ervin, CEO of the crypto-focused asset manager Blockforce Capital, told Bloomberg today that the sell-off in perceived inflation hedges such as bitcoin comes as a result of the market now expecting that the Fed will tame price growth in the US.

“The market is starting to price in some cooling off of those inflation expectations and Bitcoin is starting to selloff accordingly,” Ervin explained. He added that if inflation “continues to go and go and go” without the Fed being able to control it, “we’re in for a world of hurt.”

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Learn more:
– How Global Economy Might Affect Bitcoin, Ethereum, and Crypto in 2022
– Two Main Macro Scenarios in Play for Bitcoin & Crypto in 2022 – CryptoCompare

– IMF Warns of Dangers of Fed’s Rate Rise, Brazil Says Inflation ‘Won’t Be Temporary in West’
– IMF Economists: Crypto Is Not on the Fringe Anymore, Correlation with Stocks Poses Risks Bitcoin, Ethereum Could Benefit If Stocks Drop After Fed Tightening – Strategist
– US Community on Alert over Draft Law that Could Give Treasury Sweeping Powers over Crypto

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