The cryptocurrency market has reacted bearishly to the news of the interest rate hike by the United States Federal Reserve, announced by its chairman, Jerome Powell. The cryptocurrency market capitalization has fallen below $900 million due to an 8.13% drop in the price of Bitcoin, from its intra-day high of $19,950 to currently trade $18,450 as of the time of this writing.
Asides from Bitcoin, we have also seen a significant decline in the price of Ethereum and other altcoins. Ether, the native token of the Ethereum blockchain is down over 6% for the day, currently trading $1,260. Ether is also down over 20% in the last seven days as the token is reacting to a sell the rumour set up caused by the anticipation of the network’s upgrade into a Proof-of-Stake (PoS) consensus mechanism.
In addition to a 0.75% basis point hike, the Federal Reserve, after the Federal Open Market Committee’s statement, also set its 2022 target interest rate at 4.4%, leading Bitcoin analysts to forecast further downside for BTC. The decline in the market mirrored a similar sudden correction in the U.S. stock market, with the benchmark S&P 500 dropping 0.5% minutes after the Fed update.
What you should know
- The 10-year U.S. Treasury note yield surged to 3.6% after the Fed’s announcement, against 3.56% five minutes before it. Similarly, the yield on the 2-year Treasury note climbed from 3.98% to 4% in the same timeframe. The U.S. dollar index (DXY), which measures the strength of the United States dollar against a basket of top foreign currencies, surged to 111.57 for the first time in 20 years.
- The U.S. Fed also published an updated “dot plot,” which complied with its officials’ individual interest rate projections by the end of 2025. These forecasts signalled additional rate hikes in the future, with the 2022 target sitting at 4.4% and 2023 targeting 4.6%. The central bank officials also predicted that the policy rate would peak at 4.6% in 2023. Thereafter, it would decline to 3.9% in 2024, followed by another drop to 2.9% in 2025.
- Overall, the interest rate hike has caused both an increase in the strength of the dollar and a fall in the price of Bitcoin. These reactions, after the Fed’s update, reflected investors’ growing appetite for cash and cash-based instruments compared to riskier assets. Meanwhile, the central bank’s dot plot hinted that investor sentiment would remain unchanged until the end of 2023. This ultimately indicates that we may see Bitcoin and other crypto assets trade at these levels till the end of 2023.
- Bitcoin price could continue to suffer due to the Fed’s hawkish stance and its attempts to bring inflation down from its current 8.3% level. After the central bank update, many analysts have noted that BTC’s price could break below its current technical support range of $18,000–$20,000, given that the Fed could raise rates by another 75 bps before the close of the year.
- Also on technical analysis, Bitcoin’s outlook appears equally bearish as its macro-outlook. The flagship cryptocurrency asset has been forming a bearish reversal pattern dubbed the “head-and-shoulders,” whose profit target sits around $14,000. Conversely, a rebound from the head-and-shoulders support level of $18,800 could have Bitcoin eye $22,500 as its interim upside target. However, analysts favour the former as opposed to the latter.
Before the interest rate hike announcement, investors’ optimism was growing even before the announcement at the end of the FOMC meeting Wednesday. BTC’s hourly chart showed five consecutive hours of positive movement, leading into the start of the U.S. trading session, where the news was released. The Fed stated plainly that while inflation remains high, the central bank is committed to returning inflation to its 2%. However, the bank barely mentioned the possibility of improvement in 2022.
According to the FOMC statement, expectations for GDP growth range from 0.5% to 1.5% for 2023 and 1.4% to 2% for 2024. Estimates for higher, future interest rates and muted expectations for economic growth, are likely to present a hurdle for asset valuations. Thus, today’s report implies that bitcoin and other risk assets will continue to face challenges.