Fed's Rate Hike Impact: Crypto Market Braces for Possible Volatility

Fed's Rate Hike Impact: Crypto Market Braces for Possible Volatility

The U.S. Federal Reserve's highly anticipated interest rate decision is on the horizon, and while most expect a 25 basis points (bps) hike, the bigger question revolves around the possibility of further tightening in the future. The crypto market, having experienced a crash last year partly influenced by the Fed's tightening cycle, now awaits the central bank's announcement with cautious optimism.

Chairman Jerome Powell is scheduled to hold a press conference shortly after the 18:00 UTC (14:00 ET) announcement, where the Fed is expected to raise the interest rate to a 22-year high of 5.25%-5.5%. According to a Reuters survey of economists, many predict this hike to be the last for a while, with Fed funds futures also indicating expectations of steady rates until early next year. However, some crypto observers hold a different perspective.

Analyzing the Fed's Summary of Economic Projections (SEP) from June, which outlines the median forecast among Fed officials, some believe that markets have yet to fully embrace the possibility of more rate hikes. While the SEP suggests two more 25 bp hikes by year-end, the market seems more inclined to predict just one hike as the likely outcome.

Crypto trading firm and liquidity provider GSR's research analyst, Matt Kunke, aligns with the SEP forecasts, anticipating another hike later in the year due to the persistent inflation, as measured by Core PCE, the Fed's preferred inflation gauge.

Bank of America also expects a second 25bp hike in September, though they acknowledge that further actions beyond July will be heavily influenced by economic data.

The market sentiment since June's Fed meeting has been influenced by continued labor market strength, declining inflation, and the prospect of a soft economic landing. As a result, stocks surged, and investors adjusted their expectations regarding further tightening. Bitcoin, in particular, experienced a 16% rally, buoyed by optimism surrounding spot-ETFs and the 'goldilocks' economic scenario.

Despite the recent weakening correlation between bitcoin and stocks, market participants are aware that correlations can change rapidly. The potential for more rate hikes beyond July might trigger investors to reduce risk exposure, affecting risk assets, including cryptocurrencies.

Crypto traders are closely monitoring the Fed's statement and Chairman Powell's press conference for any indications of a hawkish tone that leaves room for additional rate hikes this year. A hawkish stance could exert further downward pressure on markets, including the crypto space.

David Lawant, head of research at FalconX, highlights the importance of the Fed's tone for future market movements. He points out that while inflation has been receding, the favorable base effects may not be as pronounced going forward, hinting at the potential for a hawkish Fed stance.

Amidst the excitement within the crypto industry, some experts caution that it may be too early to fully embrace the current crypto bull market. Any hawkish remarks from Chairman Powell or the subsequent minutes may pose challenges to the recent crypto rally.

As the crypto market navigates the Fed's decision and its potential implications, traders must remain attentive to traditional market reactions and closely monitor how the Fed's communication may impact overall market sentiment. The uncertainty surrounding future rate hikes adds an element of caution to the crypto market's outlook, emphasizing the importance of staying informed and agile in response to changing market dynamics.

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