As the market sessions pass, the debate over the Federal Reserve’s (FED) future monetary action is enriched by new economic aggregates that reinforce the scenario of a final Fed funds rate hike. For bitcoin, it’s a question of standing firm against the rise of two of its fiercest enemies, the US dollar and rising interest rates.
Bitcoin VS the US dollar & rates, the devastating inverse correlation
Bitcoin has been in retracement for 6 weeks now after testing $30,000. The bullish gap on Monday 29 May has not allowed the corrective configuration to be broken. This corrective pattern takes the form of a clearly visible bearish chartist channel on BTC and Ether (ETH), as well as on the chart of total crypto market capitalisation.
Why has this corrective sequence lasted so long? Is it threatening to wipe out the entire rise since the start of the year? That’s what we’re going to look at together in this technical analysis of the cryptocurrency market.
At the beginning of June, the bitcoin price is still up 62% since the start of the year. As for ETH/USD, it has appreciated by 55% over the same period.
The first reason is fundamental, with the still unresolved debate over the likelihood of an economic recession in the West, against a backdrop where inflation, although falling, is still too high to allow central banks to adopt an accommodating monetary policy.
But it seems to me that the most powerful brake on a resumption of the annual rise in BTC is to be found in cross-asset factors. The foreign exchange market and the credit market (bonds/interest rates) are the two largest markets in the world in terms of daily trading volume and amounts under management. On these two markets, the young crypto asset class is encountering two enemies, both fierce and powerful:
- The US dollar against a basket of major currencies (market code, DXY) ;
- The uptrend in Western bond yields, particularly those in the United States, as a direct result of the Fed’s monetary policy.
The starting point of the bear market in the autumn of 2021 was triggered by the simultaneous bullish reversal in interest rates and the US dollar, and currently it is these same bullish movements that are generating the retracement of BTC below $30,000.
Graph produced with the TradingView website, which juxtaposes 3 pieces of market information: the bitcoin price in weekly Japanese candles on an arithmetic scale, the curve of the US dollar against a basket of major currencies (DXY) and the US 2-year bond yield.
Will the FED raise rates one last time in June or July, yes or no?
So is the bitcoin price threatening to retrace further and break the major support of $25,000? Only the members of the FED’s monetary policy committee know the answer, as their decisions at the meetings on 14 June and 26 July will shape market movements. The Fed’s key rate is currently 5.25%, and there is a 55% chance that it will rise to 5.50% this summer (compared with less than 10% at the start of May).
For BTC to resume its upward march, the FED needs to make it clear soon that it has reached its terminal rate, because if there is still any doubt then the crypto market will struggle to find a catalyst to resume its rise. In the meantime, the $25,000 support remains the chart boundary between restarting the year’s rebound momentum and wiping it out altogether.
Graph produced with the TradingView website, which juxtaposes 2, 10 and 30-year US bond yields and the most likely terminal Fed rate
