The Pelosi Effect? Ethereum Faces Headwinds Over Area At $1,600

Ethereum has lost steam after a week of trading in profits. The elements for a potential extension of the bullish momentum were laid out in the macro-economic stage. Still, rising tensions between China and the United States have brought back uncertainty to the global financial world.

U.S. Congresswoman and Speaker of the House of Representatives Nancy Pelosi visited Taiwan earlier this week. Her visit is controversial, as Taiwan is considered a territory in open rebellion by China.

The latter responded to Pelosi’s visit by firing artillery near Taiwan and announcing military exercises, the Asian giant considers this an “act of provocation”. So, tensions about a potential conflict between the U.S., Taiwan, and China in the near future emerged.

Investment firm Cumberland believes the above highlights the tight correlation between Ethereum, the crypto market, and the traditional finance sector. The second crypto by market cap has been trending downside in the short term as a result of this uncertainty.

Ethereum and Bitcoin have been highly correlated with the Nasdaq 100, the index that tracks big tech stocks. Cumberland believes that if ETH’s price can break this correlation, the cryptocurrency will be able to reclaim previous highs. Until then, ETH’s bullish momentum seems limited.

The investment firm said the following on ETH’s price fate as long as it remains correlated with legacy markets:

Until crypto decorrelates from the broader macro backdrop, it will be difficult for these themes to generate meaningful alpha. That said, the upcoming merge threatens to reestablish digital asset markets as an independent asset class.

The Merge is the highly anticipated event that will combine Ethereum’s execution layer with its consensus layer. This event might be important enough to provide bulls with fresh momentum and break the correlation with the Nasdaq 100.

Before The Merge, Ethereum Ecosystem Outperforms

The Merge is already having a positive impact across the Ethereum ecosystem, and on the other two assets, Lido DAO and Ethereum Classic (ETC). A report from Kraken Intelligence shows that the ETH ecosystem has and continues to outperform the crypto market.

In July, ETH’s price, decentralized finance (DeFi) and non-fungible tokens (NFTs) recorded an average of 59%, 52%, and 35% profits respectively. Thomas Perfumo, Head of Business Operations and Strategy at Kraken, said the following on the potential impact of The Merge:

ETH is holding value during this crypto winter against BTC, a significant departure from the prior cycle. All eyes are on The Merge, the most significant milestone to Ethereum’s scaling roadmap since the launch of the beacon chain in late-2020. If successful, the industry will have the clarity to take a longer-term outlook on Ethereum.