Bitcoin (BTC) Rally Could Stop If Fed Governor Powell Doesn’t Signal End Of Tightening, Crypto Observers Say

Bitcoin (BTC), the world’s largest cryptocurrency by market capitalization and a macro asset that closely tracks the liquidity targets of the US dollar, has seen a resurgence this year, with prices rising 70% since January 1.

The rally could hit a temporary roadblock if Federal Reserve (Fed) Chairman Jerome Powell refrains from signaling a long-awaited pause in the tightening cycle on Wednesday, according to some observers.

The Fed will announce its rate decision on Wednesday at 14:00 ET (18:00 UTC). Half an hour later, Powell will speak at the press conference after the meeting. Fed funds futures show traders expect the central bank to raise interest rates one last time by 25 basis points to a range of 5%-5.25%, ending the so-called tightening cycle that rocked cryptocurrencies last year. Furthermore, traders are pricing interest rate cuts from July onwards.

The aggressive pricing of breaks and rate cuts means Powell will have to confirm the same during the presser, or Treasury yields and the US dollar (USD) could bounce. A rise in yields and the dollar has historically been bearish for bitcoin.

“As the market anticipates a pause after this hike, we would look for the phrase ‘further policy tightening may be appropriate’ to be removed from the statement, replaced by more open-ended language that leaves the door open to either more rate hikes or a pause, i.e. data reliance ,” Dick Lo, founder and CEO of quant-powered crypto trading firm TDX Strategies, told CoinDesk.

“We expect Chairman Powell to shy away from being definitive when it comes to a pause that could disappoint the market,” Lo added.

Markets have seen classic risk-on action since October 2022, largely in anticipation of a dovish Fed pivot. The dollar index, which measures the dollar’s value against major fiat currencies, has fallen more than 14% since the beginning of October. Meanwhile, Wall Street’s tech-heavy Nasdaq index and bitcoin have risen 25% and 50% in the same period.

Therefore, the lack of conviction from Powell in signaling the pivot could disappoint markets, as Lo warned, and trigger a rally in the dollar.

Chris Weston, head of research at currency brokerage Pepperstone, expressed a similar opinion Twitter.

“Sure, bank stocks have been hit – but with nothing priced in for June and cuts starting in July, if the Fed offers a lazy tightening bias (data dependent), it feels the risk [is] skewed on the hawkish side,” Weston said.

Weston said the pre-Fed dovish pricing is similar to the setup seen before the Reserve Bank of Australia’s recent rate decision. On Monday, the RBA raised interest rates by 25 basis points and warned of more tightening going forward, contradicting expectations of a continued pause and possible easing later this year. The hawkish surprise saw the Australian dollar rise across the board.

According to Weston, the uptick following the meeting of yields and the dollar, if any, could add to problems in the banking sector and is likely to be short-lived. Bitcoin has performed positively during the recent banking turmoil, strengthening its safe haven.

“I will assume this first move [higher in USD] would be short-lived as any decent rise in bond yields would send bank stocks another leg lower and traders would simply re-use USD and crude shorts and buy gold and JPY as a hedge.” Weston noted.

However, some observers do not foresee a sustained dollar rise, regardless of what Powell says at the press conference after the meeting.

“The US dollar is unlikely to rise here as expectations of a possible dove pivot by the Fed will be kept alive – regardless of whether the Fed hikes again or signals another hike,” Markus Thielen, head of research and strategy at the provider of crypto services Said Matrixport.

“The stress is that the banking sector is deflationary and energy costs have fallen significantly. The Fed is also seeing progress in their request for higher unemployment, and this should provide comfort that rate hikes are coming to an end. Bitcoin is likely to rally on a dovish pivot,” Thielen added.