Fed Gives Crypto a Short-Term Boost, But Outlook Still Murky

Key Points

• The crypto market rallied on Wednesday, after Fed Chair Powell ruled out 75 bps rate hikes in the months ahead.
• The Fed delivered a 50 bps rate hike and announced QT plans as expected.
• With plenty of Fed tightening expected this year, conditions remain difficult for crypto.

Fed boosts crypto markets

The overall market capitalization of cryptocurrencies surged more than 5.0% on Wednesday, following a less hawkish than expected US Federal Reserve policy announcement. The total crypto market cap rallied to as much as $1.79 trillion on Wednesday, from under $1.75 trillion prior to the Fed’s policy announcement.

Bitcoin (BTC) jumped from under $39,000 per token to highs above $40,000, before closing near $39,700, with gains of over 5.0% on the day. Ethereum (ETH), meanwhile, jumped from the mid-$2,800s per token to nearly as high as $3,000, before closing just under $2,950, with gains of nearly 6.0% on the day.

The Fed lifted the Federal Funds target range by 50 bps to 0.75 to 1.0% and outlined plans to reduce the size of its balance sheet on Wednesday, as expected. Meanwhile, in his usual post-policy announcement press conference, Fed Chair Jerome Powell signaled further rate hikes of the same magnitude were probably at upcoming meetings and ruled out the possibility of any 75 bps hikes.

Given markets are already expecting the Fed to raise interest rates back to around 2.5% by the year’s end but had been fretting that the Fed might want to go with a 75 bps hike in the months ahead, Powell’s remarks were met with relief.

US stocks rallied, precious metals rallied and US bond yields and the US dollar fell. Cryptocurrency markets are closely correlated to risk assets like US tech stocks, but also have an inverse relationship to US yields and the US dollar.

That’s because higher yields mean a higher opportunity cost of holding non-yielding assets, like cryptocurrencies, and a stronger dollar makes USD-denominated cryptocurrencies more expensive for international buyers.

Conditions moderate on Thursday

Profit-taking following recent upside has since seen the total crypto market cap drop back to around $1.77 trillion on Thursday, leaving it still higher by about 3.3% on the week. That has coincided with a modest pullback in BTC/USD to just above $39,500, with the cryptocurrency pair trading nearly bang on its 21-Day Moving Average, a level that has provided significant short-term resistance in recent weeks.

If BTC/USD was to sustain a break above the 21DMA and $40,000 level, that would be a big short-term victory for the bulls. With the pair now above a short-term descending trend channel, a rally back towards the 50DMA near $42,000 and the mid-April highs at $43,000 is not off the cards.

ETH/USD, meanwhile, is also a tad lower on Thursday in the low $2,900s and also trading nearly bang on its 21DMA. ETH/USD also broke above a short-term descending trend channel on Wednesday, which technicians think could set the stage for a short-term push higher into the low-$3,000s.

What’s next?

Fed Chair Powell’s remarks on Wednesday have taken the edge off of the market’s fears about “excessively” rapid monetary tightening over the next few months (i.e. 75 bps interval rate hikes rather than 50 bps moves).

But interest rates will still be rising at a fast pace over the next few quarters, with Powell on Wednesday strongly reiterating the Fed’s intent to quickly move away from accommodative monetary policy in order to tackle sky-high inflation in the US.

If the YoY rate of US Consumer Price Inflation doesn’t moderate sufficiently back from its current levels at multi-decade highs near double digits in the second half of the year, risks remain tilted towards the Fed signaling intent to move interest rates substantially above the so-called “neutral” level of 2.5%.

That suggests it remains far too soon for crypto traders to declare victory that peak Fed hawkishness has now been seen and the cryptocurrency market’s bottom is in.

The short-term technicals have turned more positive following the recent break higher.

But the still unfavorable broad macro backdrop suggests that recovery to back above, say $2.0 trillion in the total crypto market cap, (or roughly back above the $45,000 mark in Bitcoin) does not seem likely in the coming weeks.

In the immediate future, Fed policy and the state of the US economy will remain in focus with the release of the official April US labor market report on Friday. Any evidence of accelerating wage pressures in the US would only reaffirm inflation, and thus hawkish Fed, risks.

As a result, it’s likely to be a choppy end to the week for crypto.