Bitcoin unstable at $39K ahead of Fed’s scary interest rate hike

Key Takeaways:

  • Bitcoin (BTC) grappled below $40K as the correlation with equities persisted.
  • The Federal Reserve's quantitative tightening cycle could start on May 4.
  • Economic turmoil brought forth by the war in Ukraine weakened the basket of global currencies, pumping the DXY to a 20-year high.
Bitcoin, Bitcoin unstable at $39K ahead of Fed’s scary interest rate hike
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YEREVAN (CoinCHapter.com) — Bitcoin (BTC) traded around $39,000 in the Asian-Pacific session on May 2, after wiping out the weekend losses. However, the pullback risks persisted, as the flagship crypto could lose 5% in the upcoming session, dropping back to a confluence of support at approximately $37,000.

Bitcoin (BTC) price on May 2. Sourec: CoinMarketCap.com
Bitcoin (BTC) price on May 2. Source: CoinMarketCap.com

Bitcoin bearish in the short-term

In detail, the digital asset’s lowering trading volumes waved a bearish flag, indicating insufficient force behind the current uptrend. Additionally, Bitcoin charted below its 20, 50, 100, and 200-day moving averages, showing weakness on the trend-based oscillators.

Thus, the short-term technical forecast says BTC could retest the indicated support level before attempting an upside move.

Bitcoin (BTC) daily price action featuring a falling wedge. Source: TradingView.com
BTC/USD daily price action featuring a falling wedge. Source: TradingView.com
Also read: Bitcoin bobs around $39K as traders head for the hills liquidating $500M longs – what’s next?

Meanwhile, Bitcoin price remained dependent on a flurry of macroeconomic factors that did not favor the crypto bulls either. For example, the digital asset’s correlation with stocks (S&P500) continued to rise, digging a deeper hole for the crypto market.

Bitcoin vs. Equities

Crytpo analytical platform Ecoinometrics asserted that Bitcoin’s positive correlation with equities persisted in the previous month. As long as BTC behaves like a risk asset, it could lose billions against the rising dollar.

Bitcoin's correlation to the S&P500 (SPX). Source: Ecoinometrics weekly report.
Bitcoin’s correlation to the S&P500 (SPX). Source: Ecoinometrics weekly report.

In detail, risk assets such as stocks tend to flourish in times of economic stability, as traders manifest high-risk/high-reward behavior. Conversely, when the economic environment is turbulent, investors turn to sanctuary assets instead, such as gold and the precious metal market.

Also read: U.S. GDP drops 1.4% in Q1 2022 in latest evidence of recession prospects.

The number one risk for Bitcoin is that it is trading like a risk asset (highly coupled to the stock market) at a time where the Federal Reserve is starting a quantitative tightening cycle. You can pretty much ignore everything else until we get a crash or the Fed restarts the money printer. Whichever comes first. 

further clarified the Ecoinometrics report.
Bitcoin's correlation with stocks continues. Source: TradingView.com
Bitcoin’s correlation with stocks continues. Source: TradingView.com

Moreover, the mentioned quantitative tightening cycle will start on May 4, as traders shift their attention to the Fed’s hawkish policies.

Also read: EU Lawmakers want Bitcoin (BTC) mining banned: Favor Ethereum (ETH) instead.

Fed’s 50 bp interest rate hike

As CoinChapter earlier reported, an increase in government bond interest rates is one of the ways to tackle growing inflation.

Higher interest rates make borrowing money more expensive. Thus, the cost of doing business rises for public (and private) companies. Higher costs slow the demand, catching it up with supply, putting merchants under more pressure to slash prices and lure the public to buy their products. Hence inflation subsides.

Also read: The Central African Republic adopts Bitcoin as legal tender while BTC price drops below $40K.

Many financial institutions, analysts, and economists expect the Federal Open Market Committee (FOMC) to raise interest rates this week aggressively. For example, the Dutch banking and financial services corporation ING Group reported a big hike would come this Wednesday.

The Federal Reserve is widely expected to raise its policy rate by 50 basis points next Wednesday as 8%+ inflation and a tight labour market trump the surprise 1Q GDP contraction attributed to temporary trade and inventory challenges.

stated the report.

The quantitative tightening anticipation hiked the U.S. dollar index (DXY), the variable measuring its strength against a basket of foreign currencies.

Dollar Index (DXY) at a two-decade high

The U.S. dollar index surged 2% the previous week in a fourth consecutive weekly rally. As a result, the DXY rose to a 20-year high on Apr. 28, clocking in at nearly 104, totaling the dollar’s gains at 8% year-over-year.

Broad dollat (DXY) at a 20-year high. Source: TradingView.com
Broad dollar (DXY) at a 20-year high. Source: TradingView.com

The interest rate hikes supported the DXY upside move. However, the immediate catalyst came from the Bank of Japan, as Yen slid to a 20-year low. The Central Bank underlined its determination to defy the global trend toward tighter monetary policy by maintaining its stance on near-zero bond yields.

Also read: Bitcoin (BTC) jumps 6% after Fidelity announces crypto exposure to 401k plan holders – dead cat bounce?

Additionally, the Euro and GBP significantly lost investors’ confidence, sinking to five-year and two-year lows. In detail, high oil prices driven by Russia’s invasion of Ukraine, coupled with Europe’s determination to deny Russian fuel imports, threatened the region’s energy-importing economy. Thus, Eurozone’s ability to raise interest rates fell under question.

Conclusion

While Bitcoin bulls hope to see BTC back on its feet, the flagship cryptocurrency heavily depends on several macroeconomic factors. Firstly, its correlation with the risk-on assets, such as equities, hindered the bullish attempts, as the stocks fell against the strengthening dollar. The greenback, in turn, benefitted from the global turmoil linked to the war in Ukraine and Fed’s hawkish monetary policy.

Thus, expectations from the crypto market remained low in early May. Moreover, the bearish outlook is not likely to shift for as long as the quantitative tightening pumps the broad dollar and global banks attempt to leash the growing inflation worldwide.

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Bitcoin, Bitcoin unstable at $39K ahead of Fed’s scary interest rate hike

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