Bitcoin consolidates as Fed rate decision nears, awaiting signal on rate cuts
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Bitcoin consolidates as Fed rate decision nears, awaiting signal on rate cuts
The price movement suggests this is "more of a technical correction" rather than a shift in broader market sentiment.
Navigating Web3 tides with focused insightsBy Mary Liu, Bitpush News
U.S. inflation data released Tuesday came in line with expectations, potentially good news for cryptocurrency prices. However, on the eve of the Federal Reserve's final interest rate decision of the year, both Bitcoin and Ethereum posted slight declines, with Bitcoin hovering around $41,000 and Ethereum trading just below $2,200.
In the altcoin space, Solana also cooled off on Tuesday after surging over 22% in the first three days of the month. Jito’s JTO token, launched last week through a governance token airdrop for the Solana-based liquid staking protocol, initially priced at $1.20 and rose 261% last week, fell to around $2.92 on Tuesday.
Profit-Taking
According to Glassnode data, cryptocurrency holders sent $2 billion worth of Bitcoin to exchanges, the highest daily amount since the Terra collapse. Funds sent to exchanges suggest traders are preparing to sell their assets.
CryptoSlate analyst James Straten noted that the broad sell-off reflects a profit-taking mentality among traders.
James Butterfill, research director at investment firm CoinShares, believes the price movement indicates "more of a technical correction" rather than a shift in broader market sentiment.
Butterfill explained that given the significant price gains in December and the Relative Strength Index (RSI) consistently above 70, this adjustment is not surprising. RSI is a tool used to measure short-term market momentum. A reading above 70 suggests an overbought market, while below 30 indicates oversold conditions.
Leverage Adjustment
The crypto market consolidation could also be due to leverage adjustments. Noelle Acheson, author of the newsletter "Crypto is Macro Now," wrote that this "can be painful but is usually good news."
Last week, the cryptocurrency futures market sent warning signals, indicating leveraged speculation had become somewhat excessive—meaning traders were increasingly using borrowed funds to speculate.
"We can see this in funding rates, which are fees paid by traders to hold long or short positions in perpetual cryptocurrency futures contracts," Acheson said.
She added that Bitcoin funding rates spiked to their highest level since November 2021 on Saturday. That same month, Bitcoin reached its all-time high near $69,000. The surge in funding rates triggered the sale and liquidation of leveraged long positions—a common occurrence in the crypto market.
Noelle Acheson analyzed: "Typically, once misalignments are absorbed, prices resume their prior trend. These dips can be seen as a healthy deleveraging of excess exposure. In fact, Bitcoin funding rates have now returned to more normal levels, and the underlying momentum for Bitcoin and other cryptos remains strong."
Positive Macroeconomic Outlook
Data released by the Department of Labor showed U.S. inflation in November met expectations. Overall inflation rose 3.1% year-on-year and 0.1% month-on-month. While prices in the U.S. continue to rise, the pace has slowed, suggesting the Federal Reserve's campaign to combat inflation through rate hikes may soon be ending. Disinflation could pave the way for central banks to begin cutting rates next year.
Trading markets expect at least two rate cuts in 2024. Goldman Sachs anticipates the first cut will occur in the third quarter of next year.
CME's FedWatch tool shows a 40% probability of a rate cut by March 24.
Rate cuts could support further gains in Bitcoin and cryptocurrency prices, as risk assets typically perform better in low-interest-rate environments.
Market watchers will closely monitor Federal Reserve Chair Powell’s speech on Wednesday for any hints about future policy direction. If the central banker adopts a dovish tone, it could boost markets amid rising hopes of rate cuts.
Traders expect the Fed to hold rates steady and update projections, setting rates at 4.876% by mid-2024. Analysts say if everything proceeds as planned, it should push up risk asset prices.
Caleb Franzen, founder of Cubic Analytics, posted on X: "Disinflation is fully underway, and the latest CPI data from November 2023 further confirms this trend remains intact."
Bitfinex analysts said in an email report: 'There is broad expectation that a pause in rate hikes could be interpreted as a bullish signal for markets. Cryptocurrencies have previously experienced positive market movements following the Fed's decision to keep rates stable.'
Tom Essaye, founder of Sevens Report Research, said: 'As long as Fed Chair Jerome Powell doesn’t sound too hawkish during the press conference, this outcome could spark a modest market rally and potentially serve as a catalyst for continued gains into year-end. To be clear, this result won’t bring anything fundamentally new, but it will eliminate the risk of a hawkish surprise and provide upward momentum heading into the end of the year.'
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