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Bitcoin (BTC) traders are adopting a cautious approach in anticipation of the U.S. Federal Reserve meeting on Wednesday. The central bank is expected to maintain interest rates at their current level but may signal the possibility of future increases. This move has been characterized by some observers as a "hawkish pause," prompting traders to take defensive measures.
The Federal Open Market Committee (FOMC) is scheduled to unveil its decision on interest rates this Wednesday at 2 p.m. ET (18:00 UTC), followed by Chair Jerome Powell's press conference half an hour later.
According to the Fed fund futures, interest-rate traders anticipate that the central bank will maintain the benchmark borrowing cost within the range of 5% to 5.25%. This comes after a significant increase of 500 basis points (equivalent to 5 percentage points) since March 2022. The aggressive cycle of rate hikes, combined with the reduction of the balance sheet, resulted in the destabilization of various risk assets, including cryptocurrencies, throughout the previous year.
The central bank is anticipated to signal a likelihood of ongoing tightening in the upcoming months. As of now, Fed funds futures indicate a slightly higher than 50% chance of the Federal Reserve raising rates by an additional 25 basis points in July. Market expectations for rate cuts at the end of the year have been removed from the forward rates curve.
Options risk reversals data tracked by Singapore-based crypto trading giant QCP Capital indicates that puts, or bearish bets, associated with bitcoin are commanding higher prices than bullish calls leading up to the Federal Reserve meeting. This suggests a prevailing nervous sentiment in the market.
"For the FOMC meeting, we think the risk is that they do a 'hawkish skip' – implying they pause at this meeting, but raise their median dot [interest rate] projection to show a continued hiking bias to appease the committee hawks," QCP Capital's market insights team said in an update published Tuesday, adding that "risk-reward balance this week favors being long BTC and ether puts."
The U.S. headline consumer price index (CPI) dropped to its lowest level in two years, reaching 4% in May, which is below the current Fed funds rate. This development provides an opportunity for the Federal Reserve to maintain interest rates at their current level during Wednesday's meeting, as suggested by QCP.
Nevertheless, both the headline Consumer Price Index (CPI) and the core Personal Consumption Expenditures (PCE) index, which is the Federal Reserve's preferred inflation gauge, stand at 4.7%, significantly exceeding the central bank's longstanding goal of 2%. As a result, the Fed finds itself constrained in its ability to bring an end to the current tightening phase.
Furthermore, when positive inflation-adjusted interest rates, referred to as real rates, are present, they typically diminish the appeal of zero-yielding assets such as gold and bitcoin.
"Positive real rates generally are bad for zero-yielding assets, and generally, BTC has been negatively correlated with real yields," QCP added.
Risk reversals track the spread between implied volatility premium of cheap out-of-the-money calls and puts.
A negative spread indicates bias for put options. (QCP Capital)
In the past, certain cryptocurrency traders relied on the post-Fed movements in the U.S. stock markets to determine their course of action. However, this strategy may prove ineffective now due to the diminishing correlation between bitcoin and the S&P 500 and Nasdaq equity indexes.
"A Fed rate hike skip is likely to be celebrated by equity bulls who have already helped fuel the S&P 500 to new yearly highs," Joshua Olszewicz, the head of research at alternative asset management firm Valkyrie Investment, said in a weekly market review published Monday. "Bitcoin and Ethereum have not benefited from a risk-on-equity environment over the past few weeks, potentially hinting at the unease regarding pending regulatory actions."
David Brickell, director of institutional sales at crypto liquidity network Paradigm, suggests that if Powell adopts a hawkish stance, he might find it challenging to surpass market expectations, thereby enabling a rebound in risk assets.
"The consensus is for the hawkish skip, so the bar might be quite high for Jerome Powell to out-hawk the market," Brickell told CoinDesk. From a communication perspective, I think it’s difficult to sound too hawkish when you’re taking a pause, so my bias would be that it’s interpreted as more dovish relative to expectations Rates [yields] then, I think, drift lower and BTC rallies, but I’m not expecting it to trigger a big move."
At the time of reporting, Bitcoin was seen trading near $25,940 with marginal fluctuations, as per CoinCryptoUs data.
