Bitcoin price freeze ahead of FOMC meeting, how to trade it

After a massive rally of over 42% in the last ten days, Bitcoin is currently stagnating below the $28,000 mark, due to the upcoming Federal Open Market Committee (FOMC) meeting of the US Federal Reserve (Fed).

As seen before previous FOMC meetings, the Bitcoin market is moving to a risk-off strategy ahead of the Fed’s release of the new policy rate. Tomorrow, Wednesday, the March interest rate decision will be released at 2:00 PM EST, before Fed Chair Jerome Powell steps in front of the cameras for the FOMC press conference at 2:30 PM EST.

Expectations have changed massively in recent days, and are also seeing almost hourly changes. At press time, there was a 17% probability of a pause and an 83% probability of a 0.25% increase in the US federal funds rate, according to the FedWatch tool.

More important, however, will be Jerome Powell’s guidance going forward and how the dot plot, and thus the estimated terminal velocity, will evolve. For the first time this year, the Fed will publish the dot plot, which will provide great insight into the Fed’s view, especially in light of the further deepening of the banking crisis.

Bitcoin scenarios for the FOMC meeting

The co-founders of the chain analysis company Glassnode, Yann Allemann and Jan Happel, write in their latest analysis that the Bitcoin market is well positioned for the FOMC. According to the Glassnode founder, the Bitcoin risk signal shows a bullish structure similar to that seen in March-April 2020 and summer 2021.

According to the analysts, the market is already set for a rate hike of 25 basis points, so the market should not react too aggressively if the Fed continues to raise interest rates. But if the Fed takes a break, the analysts “expect a strong upside move.”

As for the options market, the analysts explain that the price dynamics between puts and calls indicate that demand for calls has increased significantly despite Bitcoin’s break below $28,000. “Note the low 1-month 25D bias indicating more expensive (higher demand) calls with respect to puts.”

However, the Glassnode founders also warn: “However, implied and realized volatility have increased and TradFi is showing signs of caution,” noting that robust buy and sell walls have formed around $25,500 and $30,000, respectively.

The biggest risk, they note, is the number of long positions opened in the perpetual market between $27,000 and $28,000, which could lead to liquidations.

According to Eight Global founder and analyst Michaël van de Poppe, Bitcoin still looks like it is about to roll over and is showing a small distribution pattern. According to him, there are two scenarios to the FOMC meeting.

Sweep over recent high to $28,800 through FOMC and then a sharp drop [or] lose $27,000 and continue the decline to $25,000. I am interested in $23,300 and $25,000 for fall.

Charlie Bilello, marketing strategist at Creative Planning, so in his latest tweet that the 2-year government bond yield is now below 4%. A week ago it was over 5%. This is the sharpest 5-day decline in returns since the October 1987 crash, so he concludes:

The market is calling the Fed’s bluff on further tightening after next week’s FOMC meeting. Fed Funds Futures: 1 more hike, then rate cut.

In general, traders should be wary of betting on a pivot as early as March. At every FOMC meeting since March 2022, Jerome Powell has said: “the job is not done”, “will continue to raise rates” and “history warns of premature unwinding”. Still, leading into the FOMC, some market analysts say “this one he will turn.”

A surprise is still not out of the question. Goldman Sachs predicts the FOMC will pause its March meeting this week due to stress in the banking system and then proceed with three more 25 bps hikes in April, May and June.

The basic scenarios

The following basic scenarios can therefore be considered. In a max hawkish case, the Fed increases by 25 bps and the dot plot shows a rise to 525-550. Neutral can be classified if the Fed increases by 25 bps and leaves the final target unchanged at 500-525.

Neutral will also be if the Fed does not hike in March and leaves its final target unchanged at 500-525. This will mean that the Fed has two interest rate hikes ahead of it – March and April.

Dovish, on the other hand, would be if there is no hike and the Fed lowers its terminal target to 475-500, which would mean there is likely only one rate hike left (March). The maximum dove will be no increase and to leave the target rate at the current level.

Both of the latter scenarios could trigger a strong rally, with Bitcoin rising towards $30,000. At press time, the BTC price was at $27,628, facing the resistance zone above $28,300.

Featured image from iStock, chart from TradingView.com