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ETH Reconquers $1.6K, BTC Briefly Rallies Above $23,000 After Dovish 75 bps Fed Rate Hike

By:
Joel Frank
Published: Jul 27, 2022, 22:10 UTC

Wednesday’s Fed meeting wasn’t as hawkish as feared, delivering a boost to sentiment in stock and crypto markets.

Ethereum

Key Points

  • Crypto rallied in wake of the latest less hawkish than feared Fed policy announcement.
  • Bitcoin briefly rallied back above $23,000 while Ethereum pushed back above $1,600.
  • If the Fed signals a dovish outlook for 2023 as markets seem to be betting on, this could benefit crypto.

Fed Meeting Recap: A Dovish 75 bps Rate Hike

The US Federal Reserve raised interest rates by 75 bps to 2.25-2.50% target range on Wednesday as a majority of market participants had been expecting, defying a minority of market participants who had been expecting a 100 bps move and bringing interest rates back above their pre-pandemic levels. US interest rates are now roughly in line with the so-called “neutral rate” that neither stimulates nor slows the economy.

The Fed reiterated its stance that, given the backdrop of inflation running well above its 2.0% target, it still intends to lift interest rates into so-called “restrictive” territory in the coming quarters. Fed Chair Jerome Powell reiterated the Fed’s intentions to take interest rates above 3.0% by the end of the year in the post-meeting press conference.

While Powell was keen to emphasize that the Fed intends to continue taking things meeting-by-meeting and remaining “nimble” to economic developments, he acknowledged recent economic weakening as seen primarily in consumption and consumer sentiment, though also more recently cropping up in business sentiment/activity data.

Moreover, when pressed to comment on money markets that are pricing in Fed rate cuts in 2023, Powell refused to push back against expectations for easier policy next year. Markets thus interpreted the meeting as dovish, or at least, not as hawkish as feared.

Dovish Market Reaction Supports Crypto

As a result, investors began paring Fed tightening bets, with another 75 bps rate hike in September now seen as a 50/50 rather than the probable outcome prior to the meeting, according to Reuters. As a result, markets saw a classic “dovish” reaction. Yields fell at the short-end of the US treasury curve, whilst rising at the long-end as traders priced in a combination of slightly lower interest rates in the next few years and stronger growth (and thus higher rates) in the long run.

Stocks surged, the US dollar dropped, and gold rallied amid a fall in US real yields, which reflected a jump in US break-even inflation expectations. As a result, it was a bullish cocktail for crypto, which is positively correlated to risky assets like US stocks and tends to carry a negative correlation to the US dollar and US yields.

Bitcoin surged back above both its 21 and 50-Day Moving Averages in the $21,600 and $21,800 areas and briefly surpassed the $23,000 level to hit new weekly highs. It has since pulled backed to about $22,700, where it trades with gains of about 6.8% on the day and 8.5% over the past 24 hours, according to CoinMarketCap.

BTC/USD
BTC/USD rallies post-Fed. Source: FX Empire

Ethereum saw an even more impressive run higher. ETH/USD was last changing hands just above $1,600 and eyeing a test of recent highs in the $1,660 area, ahead of a potential push to the long-term $1,700 resistance level that bulls have been eyeing since the cryptocurrency’s mid-month break higher. ETH was last about 11% higher on the day and over 16% higher in the past 24 hours, according to CoinMarketCap.

ETH/USD
ETH/USD rallies post-Fed. Source: FX Empire

Other major altcoins are also performing well, with the likes of BNB, XRP, ADA, SOL and DOGE all between 6-12% higher in the past 24 hours.

Why a Less Hawkish Fed Benefits Crypto

Cryptocurrencies are seen as one of the most speculative asset classes alongside a portion of the US (and global) tech stock space. They are amongst the first that investors will want to sell when they want to adopt a more defensive portfolio stance as global financial and economic conditions worsen.

The Fed’s significant hawkish turn in the last eight months that has seen it lift interest rates by 225 bps already this year represented a significant tightening in financial conditions and crypto was naturally one of the biggest casualties. Persistently elevated US inflation is the main reason why the Fed turned so hawkish in 2022, but there are early signs that core price pressures have peaked and the recent pullback in commodity prices from recent highs suggests lower headline inflation ahead.

That, combined with signs of a weakening US (and global) economy – something the Fed acknowledged at Wednesday’s meeting – could encourage the Fed to be less aggressive with its rate hikes in 2023. Indeed, this seems to be what markets are betting on, with interest rates seen peaking around 3.5% in early 2023 before dropping back to about 3.0% by the end of the year.

A less hawkish Fed stance benefits crypto in just the same way as a more hawkish Fed stance hurts it. A less hawkish Fed means a loosening/improvement in financial conditions that may inspire enough confidence in investors to get back into risky asset classes like crypto.

About the Author

Joel Frank is an economics graduate from the University of Birmingham and has worked as a full-time financial market analyst since 2018. Joel specialises in the coverage of FX, equity, bond, commodity and crypto markets from both a fundamental and technical perspective.

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