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Bitcoin and Ether Recover as Fed Guidance Reduces Policy Uncertainty

Battered by a selloff, cryptocurrencies staged a rally Thursday alongside other assets as the Federal Reserve approved the largest interest rate hike since 1994 and provided guidance on monetary policy, easing to some extent the uncertainty in the market.

The Federal Open Market Committee (FOMC) agreed to a rate hike of 0.75 percentage points at a two-day policy meeting that ended Wednesday. The decision will increase the benchmark federal funds rate between 1.5% and 1.75%.

Following an afterthought rally in stocks and other assets, Bitcoin gained 10.5% while Ethereum rose 15.5% in the hours after the Fed’s end to interest rate speculation. weighed on the markets.

“The market, I think, appreciated that the Fed went straight with 75 [basis points] and that we have a chance to find ourselves in front of [inflation] earlier,” James Quinn, a partner at Q9 Capital, said in an interview with Forkast. “While it may cause more pain in the short term, bad news is good news for now, so to speak.”

“Bad news is good news at the moment, so to speak.”

“The Fed’s announcement is in line with market expectations, and the recovery has managed to cross the line for now,” said Igneus Terrenus, head of communications at Crypto Exchange Bybit. Forkast. “However, with the hawkish FOMC and the concomitant risk of rising unemployment and recession, retailers’ short- to medium-term appetite for risky assets such as Bitcoin will diminish,” he said.

Read more: Cryptos Crash on Inflation, Shanghai Lockdown and War Concerns

Despite Wednesday’s rally, CoinMarketCap listed Bitcoin’s price at US$21,844.80 – still down more than a quarter from last Friday, when a 12-month measure of US consumer prices rose. showed that inflation in May was at its highest level in 40 years.

The total cryptocurrency market cap, as tracked by CoinMarketCap, has risen more than 10% since the Fed’s announcement, though it has yet to recover the US$1 trillion mark that it had exceeded since January 2021.

Other important drivers were Cardano’s ADA and Solana’s SOL, which were up 11% and 20% at US$0.51 and US$33.48 respectively at press time.

Similar to Bitcoin, the gains of these two tokens do not offset the losses, as both are down around 20% and 14% respectively in the past seven days, according to data from CoinMarketCap.

Amid the market turmoil, Dogecoin was ousted from the top 10 cryptos by market capitalization. Despite rising 15% on Wednesday morning to US$0.05924, the leading memecoin is down a quarter in the past seven days.

“While there is a good chance that the overnight relief rally could extend into the next few sessions, the more aggressive rate hike cycle remains a huge headwind,” guaranteeing a recession in the first half of 2023 , said Tony Sycamore, principal market analyst at City Index, in a note. to customers.

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The Fed has signaled it will continue raising rates this year at the fastest pace in decades in a bid to contain inflation. The central bank’s so-called dot plot, used to report its outlook on interest rates, showed officials expect rates to rise by at least 3% this year.

It is important to note that the FOMC Summary of Economic Projections, a key document watched by financial market participants around the world, was unanimous on this year’s rate hike among the 18 officials who attended the meeting. At least half of them indicated that the fed funds rate may need to rise to around 3.375% this year.

FOMC Participants’ Assessments of Appropriate Monetary Policy: Midpoint of Target Range
or the target level of the federal funds rate. Source: FOMC Economic Projection Summary

However, the central bank will have to weigh this against a mandate to stimulate job growth.

Interest rate hikes are “significantly changing the topology” of the fixed income market with broader implications for the financial system, Kraken’s Jonathon Miller said. Forkast in an email. “It’s about crypto in that market participants can exit high-risk asset classes and redeploy their capital into savings,” he said.

But the European Central Bank emergency meeting to deal with power surge Borrowing costs in eurozone countries such as Italy indicate that interest rate hikes could be temporary, Miller said.

Globally, central banks may have to revert to quantitative easing in the near future, he added.

Read more: The EU will present a bill next year to plan a digital euro

Financial market observers also seem not to have fully taken into account the monetary and fiscal firepower still available to Chinawhich is struggling with slowing growth due to Covid-19 related lockdowns.

Further easing by the ECB and the People’s Bank of China (PBoC) would mean the Fed would be a lone hawk among global central banks. He may need to change course to prevent US exports from becoming expensive on the back of a stronger dollar.

This comes as the correlation between the price of Bitcoin denominated in US dollars and the Nasdaq Composite, which began towards the end of 2021, was tested this week. The world’s largest crypto by market capitalization along with other coins took the brunt of the market selloff as mostly institutional investors sold off due to issues at Celsius Network and TRON’s efforts to support The dollar peg of the USDD project stable coin brought back memories of the Terra – LUNA debacle.

Read more: Has Bitcoin become a victim of its own success?

The potential breakdown in correlation with risky assets may well fit for Bitcoin and other cryptocurrencies, which mostly retain their advantage of hedging against depreciating fiat currencies.

“Despite these short-term interest rate hikes, we’re a long way from the era of sound money,” Kraken’s Miller said. “And I wouldn’t be surprised if assets like Bitcoin came back into focus as alternative hedges against the devaluation of stocks and fiat currencies.”