In This Article:
Bitcoin (BTC) traders are taking a defensive stance ahead of Wednesday's U.S. Federal Reserve meeting, with the central bank seen likely to leave interest rates unchanged while keeping the door open for future increases in a move some observers described as a "hawkish pause."
The Federal Open Market Committee (FOMC) is set to announce the interest rate decision on Wednesday at 2 p.m. ET (18:00 UTC). Half an hour later, Chair Jerome Powell will speak at a press conference.
Fed fund futures show interest-rate traders expect the central bank to hold the benchmark borrowing cost steady in the 5%-5.25% range, having raised by 500 basis points (5 percentage points) since March 2022. The steep rate-increase cycle, coupled with the balance sheet shrinkage, destabilized risk assets, including cryptocurrencies, last year.
The central bank, however, is expected to indicate a potential for continued tightening over the coming months. At press time, Fed funds futures showed just over a 50% probability of the Fed raising rates by another 25 basis points in July. Implied rate cuts from the year-end have been priced out of the forward rates curve.
Puts – or bearish bets – tied to bitcoin are trading pricier than bullish calls heading into the Fed meeting, according to options risk reversals data tracked by Singapore-based crypto trading giant QCP Capital. The put bias shows a nervous mood 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) slipped to a two-year low of 4% in May, falling below the current Fed funds rate. That has created room for the Fed to hold rates steady at Wednesday's meeting, according to QCP.
However, both headline CPI and the Fed's preferred inflation measure, the core PCE at 4.7%, remain well above the central bank's long-held target of 2%, leaving the Fed less room to end the tightening cycle.
Besides, positive inflation-adjusted interest rates, also known as real rates, often weigh over zero-yielding assets like 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.