Bitcoin (BTC), which experienced a weak rebound on Sept. 21, saw the U.S. dollar rise to a new annual high, as investors awaited today’s Federal Open Market Committee interest rate decision.
BTC price holds $19K before Fed decision
BTC’s price is still at $19,000, with a modest daily gain in 1.33%. The U.S. dollar Index (DXY), which measures strength of the greenback versus a pool top foreign currencies, rose to 110.86. This is the highest level in 20 years.
Daily price chart for BTC/USD and DXY Source: TradingView
FOMC rate hike scenarios
The Federal Reserve will discuss the extent to which it can raise its benchmark lending rate to reduce record inflation. The market is expecting the U.S. central banks to raise rates by 75-100 basis points (bps).
Higher interest rates will likely lead to a lower appetite for riskier assets such as stocks and cryptocurrencies. Investors who want to avoid risky assets will find the U.S. Dollar to be a safe haven.
Analysts at ING stated to the Financial Times that there is no reason for Fed officials to relax their hawkishness at the Jackson Hole symposium. A [0.75 percentage points] ‘hawkish increase’ would keep the dollar close its highest levels of the year.
PostyXBT, an independent market analyst, believes that a 100-bps rate could “nuke Bitcoin” below its current technical support level of $18,800. BTC could also recover if the rate rise is lower than anticipated, which he suggests at 50 bps.
$BTC 1D Today is a huge day, as us FOMC experts will tell you. 100bps support for good? 50bps likely pumps, which gives bulls some breathing space? Going to be a very interesting daily close https://t.co/C5ClM436N6 pic.twitter.com/mJP7qpGEv1
— Posty (@PostyXBT September 21, 2022
These speculations are consistent with general expectations for a rate hike. John Kicklighter is the chief strategist of DailyFX and notes that a 50-bps rate increase would be bullish on the benchmark U.S. stock market index.
However, a 100-bps rate increase would be very bearish for S&P 500. This could also be problematic for Bitcoin. Bitcoin’s correlation with stocks is positive since December 2021.
FOMC policy decision scenarios for DXY and SPX. Source: John Kicklighter/DailyFX
Polls expect a 75 bps rate hike
Two quarters of consecutively negative growth in the U.S. economy occurred. The manufacturing PMI showed the lowest growth in factory activity since July 2020. The 2-year U.S. Treasury returns are now higher than the 10-year U.S Treasury returns. This is a yield curve.
Related: What next for Bitcoin and crypto markets now that the Ethereum Merge has ended?
These indicators raise alarm about a possible recession. These are offset by unemployment data at an all-time low and housing start rates that remain above the danger zone of $1.35million, according to Charles Edwards, founder Capriole Investments.
All new units of privately owned housing were started. Source: FRED
Normally, the Fed pivots when there are signs of recession. This means that the Fed will reduce or stop hiking rates. Edwards points out that the central bank won’t pivot because the U.S. is technically not in recession.
He wrote that “until major concerns about recession show up, and until it hurts where its counts — employment — there’s no reason to expect an immediate change in Fed policy.”
“So, it’s business as usual until there is evidence that inflation has been under control,”
44 out of 72 economists polled by Reuters predict that the Fed will raise rates by 75 bps at their September meeting. Bitcoin could therefore avoid a deeper correction by maintaining its correlation with S&P 500, according to Kicklighter’s outlook.
Bitcoin to $14K Next?
Technically, Bitcoin could fall to $14,000 by 2022 if it falls below $18,800 support. This triggers a “head and shoulders” collapse.
BTC/USD daily chart with head-and-shoulder breakdown. Source: TradingView
A rebound from $18,800 support could see BTC’s interim upside target of $22,500, or 16.5% increase, to $22,500
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