Bitcoin traders are being cautious ahead of the upcoming U.S. Federal Reserve meeting. The central bank is expected to keep interest rates unchanged for now but might leave room for future increases, which some experts are calling a “hawkish pause.”
The Federal Open Market Committee (FOMC) will announce its decision on interest rates on Wednesday, followed by a press conference by Chair Jerome Powell. Traders in the interest-rate market anticipate that the central bank will maintain the benchmark borrowing cost within the 5%-5.25% range. Since March 2022, rates have increased by 500 basis points (5 percentage points), which had a negative impact on cryptocurrencies and other risky assets last year.
However, the central bank may indicate a possibility of further tightening in the coming months. As of now, the probability of the Fed raising rates by 25 basis points in July is just over 50%. Predictions of rate cuts by the end of the year have been removed from the forward rates curve.
Options risk reversals data analyzed by QCP Capital, a Singapore-based crypto trading company, suggests that bearish bets on bitcoin are more expensive than bullish calls before the Fed meeting. This indicates a nervous sentiment in the market.
QCP Capital’s market insights team believes that there is a risk of a “hawkish skip” during the FOMC meeting. This means the central bank could pause at this meeting but still convey a bias towards future rate hikes. The team advises that this week’s risk-reward balance favors holding long positions in bitcoin and ether puts, which are options contracts that benefit from price decreases.
“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. Risk-reward balance this week favors being long BTC and ether puts.”– QCP Capital’s market insights team
While the U.S. consumer price index (CPI) fell to a two-year low of 4% in May, which could justify keeping interest rates steady, both the CPI and the core personal consumption expenditures (PCE) index remain significantly above the central bank’s long-standing 2% target. This limits the Fed’s ability to end the tightening cycle.
Additionally, when real interest rates (adjusted for inflation) are positive, assets that don’t generate yields like gold and bitcoin tend to underperform. Bitcoin, in particular, has shown a negative correlation with real yields in the past.
Overall, traders are treading cautiously in the bitcoin market ahead of the Federal Reserve meeting, considering the potential impact of the central bank’s decisions on interest rates and their implications for inflation and asset performance.