How could the Fed meeting impact Bitcoin?
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The market is pricing in a 67% chance of a 50 bps cut.
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Rate cuts have historically benefited Bitcoin’s price.
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Could a 50 bps revive recession fears?
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A favourable reaction could see Bitcoin bulls test the 60k-61k zone.
The Federal Reserve's two-day monetary policy meeting kicks off today and will conclude on Wednesday. The US central bank is set to start cutting rates, but the big question is by how much and what might this mean for Bitcoin.
The market has ramped up expectations that the Fed will kick off this rate-cutting cycle with an outsized reduction. According to the Fed funds, the market is fully pricing in a rate cut and is pricing in a 67% probability of a 50 basis point rate cut, up significantly from 35% just a week ago.
There are arguments for and against a 25- or 50-basis-point rate cut. While inflation has cooled, the hotter-than-expected monthly core inflation print has served as a reminder that inflation remains sticky, favouring a 25-basis-point cut. Meanwhile, the cooling labour market and signs that the economy is slowing faster than expected support a larger move by the Fed.
Given the uncertainty in the pricing ahead of the decision, whether the Fed decides to cut by 25 or 50 basis points, the market will likely see increased volatility.
How has Bitcoin reacted to rate cuts previously?
Historically speaking, Bitcoin has performed well following Fed rate cuts. In March 2020, Bitcoin rallied following the Fed’s rate reductions in response to the pandemic economic shock.
When the Federal Reserve cuts interest rates, this increases liquidity, which is often beneficial for risk assets such as Bitcoin or stocks. Therefore, the start of a rate-cutting cycle is often considered bullish for crypto.
However, there is a possibility that a 50-basis-point rate cut from the Fed may spook the market. Concerns over a hard landing surfaced following the weaker-than-expected July non-farm payroll report, sending Bitcoin below 50k. Should the Fed opt for an outsized hike, it risks sending the message that the Fed is behind the curve and that a 50-basis-point hike is needed to attempt to avoid a hard landing. Such a move could revive lingering recession fears, negatively impacting risk assets and the Bitcoin price.
This isn’t our base case scenario, given that the Bitcoin price has recovered from the September low of 52.5k in line with rising expectations of a 50 basis point cut. With this in mind, an outsized cut, if accompanied by calming words from the Fed, could support a move higher for the digital asset.
Where next for Bitcoin?
On the 4-hour chart, Bitcoin trades in a symmetrical triangle. A favourable reaction to the Fed’s rate decision could see buyers break out above the 60-61k zone to fuel a move higher toward 65k.
Should the Fed’s move fuel recession worries, a fall lower towards 53.7, the rising trendline support, could be on the cards.
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