Crypto Market Volatility Persists Ahead of Fed Rate Announcement

The crypto market is under pressure as the Fed rate decision draws near. All eyes are set on the FOMC meeting this week as the Fed faces a tough decision – whether to raise or to let inflation run wild.

The US banking crisis has intensified following the recent collapse of First Republic Bank. This ongoing turbulence started in March when Silvergate Bank (SVB) and Signature Bank failed due to their significant exposure to the cryptocurrency market, which was experiencing instability then.

US regulators promptly intervened by seizing the banks to regain control. However, the domino effect of the banking crisis in the US hasn’t stopped.

By the end of April, First Republic Bank (FRB) became the third major bank to fail. In March, the top banks in America, including JP Morgan, Bank of America, Wells Fargo, Citigroup, and Truist, agreed to offer FRB a $30 billion rescue deal.

Still, it was not enough to keep it afloat.

Fed Faces Tough Decision

With concerns mounting regarding the non-stop banking turmoil, Fed’s decision this week is the mainstream headline. Another rate likely officializes the economic recession, just like previous interest hikes sent shockwaves throughout the banking sector.

According to the Wall Street Journal, the collapse of SVB and SB has almost disrupted the equilibrium of the US economy, which is fragile under high-interest rates.

Given the persistent inflation exceeding the Federal Reserve’s targeted 2% and the unemployment rate remaining at record lows, financial experts believe Fed would undertake another quarter-point increment to its benchmark interest rate in the forthcoming Wednesday meeting.

The measure would elevate the federal funds rate to its peak since 2006.

However, the probability of the central bankers indicating a plan to further increase interest rates at their June meeting or maintaining flexibility in their approach remains uncertain.

According to Nicolas Colas, the founder of DataTrek Research, it is highly likely that Fed will increase the interest rate by 0.25 basis points to 5.00-5.25% during the FOMC meeting scheduled on Wednesday.

To wit,

“Wednesday will almost certainly see the FOMC raise Fed funds by 0.25 percentage points, to 5.00 – 5.25 percent.”

The markets will be closely monitoring the press conference by Fed Chair Jerome Powell for insights into future decisions. If the rate-hiking cycle ends this week, Colas anticipates that Powell will mention it during the post-meeting press conference.

The markets expect confirmation of this development, and Powell’s framing of his thoughts on the need for further rate hikes could be pivotal, given his close monitoring of Fed Funds Futures.

According to CME data, futures markets have an 89% probability of a 25 basis point hike, but there is less certainty about future actions. While some analysts predict a pause in hikes, others anticipate potential rate cuts.

Dalvir Mandara, a quantitative researcher at MacroHive, agrees with the market’s projection of a 90% chance of a 25 bp hike at the May 3 FOMC. However, Mandara disagrees with the forecast of 60 basis points of rate cuts for the remainder of 2023.

Crypto Market Volatility

This is an important week for the crypto market, as the prices of Bitcoin and altcoins are declining in anticipation of the Federal Reserve’s meeting.

Despite reaching a high of $29,975 on Sunday, Bitcoin experienced a drop to $28,500 due to selling pressure. However, it is worth noting that Bitcoin has experienced four consecutive months of growth.

Aside from the Federal Reserve meeting, other significant economic events are taking place this week, and there are ongoing issues with the First Bank of the Republic.

Mandara noted that Bitcoin is currently in a “corrective zone,” with the largest cryptocurrency trading at around $27,800.

If the head of the Federal Reserve says something that traders don’t like, Bitcoin’s price could decrease even further, potentially dipping below the weekly support level of $25,400.