Bitcoin Braces for Volatility as US Federal Reserve Meeting Looms

The price of Bitcoin (BTC) has been hovering around the $26,000 mark, remaining within its recent trading range as market participants eagerly anticipate the upcoming US Federal Reserve policy announcement. This meeting is scheduled for Wednesday to shed light on the central bank’s stance on interest rates and provide insights into the future economic and monetary policy outlook. With potential implications for the cryptocurrency market, analysts anticipate heightened volatility as Bitcoin faces headwinds.

Federal Reserve’s Monetary Policy:

Following a series of aggressive interest rate hikes initiated in March, the US central bank is anticipated to pause its rate hike cycle. Over the past ten meetings, interest rates have been raised by 500 basis points, reaching the range of 5.0-5.25%. The Federal Reserve’s policy statement updated economic projections, and the “dot plot,” a summary of interest rate forecasts from policymakers, will be released. These forward-looking components have the potential to influence crypto markets significantly.

Bitcoin’s Recent Challenges:

Since reaching yearly highs in the $31,000 range in mid-April, Bitcoin has experienced a downward trend. Two primary factors have contributed to this decline. First, market sentiment shifted as expectations for rate cuts in the latter half of 2023 waned. Second, uncertainty surrounding the regulatory environment, highlighted by actions taken against Coinbase and Binance by the US Securities and Exchange Commission (SEC), further weighed on Bitcoin’s prospects. Analysts believe that the Fed’s meeting may exacerbate these short-term challenges.

Fed’s Expected Stance:

While interest rates are expected to remain unchanged, the Federal Reserve will likely keep the door open for future rate hikes. This could reinforce market expectations of a hike in July, which is already considered the base case. The CME’s Fed Watch Tool indicates a 65% likelihood of at least a 25 basis point hike by July. However, economic projections might reveal that inflationary pressures are expected to persist above the Fed’s 2.0% target, suggesting that near-term rate hikes are unlikely. Consequently, markets may retract rate-cut expectations for the end of 2023.

Impact on Bitcoin and Yield-Sensitive Assets:

Reducing rate cut expectations for 2023 could drive US yields higher, potentially impacting non-yielding assets like gold and Bitcoin. When yields rise, the opportunity cost of holding Bitcoin increases, leading to a perceived devaluation and encouraging selling. Despite recent challenges, Bitcoin has held above its long-term support level in the $25,200-400 range. However, it remains within a bearish trend channel and trades below its 21, 50, and 100-day moving averages, indicating substantial bearish momentum.

Technical Indicators and Bearish Outlook:

Adding to Bitcoin’s woes, a widely followed version of the Moving Average Convergence Divergence indicator has recently emitted a strong sell signal. This development has prompted some market participants to anticipate further downward movement, with pessimistic traders eyeing the 200-day moving average of around $23,700 as a potential target.

With the US Federal Reserve’s policy announcement imminent, Bitcoin stands at a critical juncture. Market participants eagerly await signals from the central bank regarding its interest rate trajectory and future economic projections. The meeting outcome can potentially spark significant volatility in the cryptocurrency market. Despite recent challenges and technical indicators pointing to bearish momentum, Bitcoin continues to find support at key levels. However, the prevailing market sentiment and regulatory uncertainties overshadow its short-term prospects.