Bitcoin Falls to 3-Week Low as Market Sees Federal Reserve Raises Interest Rates to 5.65%

Bitcoin fell to a three-week low on Wednesday as US Federal Reserve Chairman Jerome Powell’s hawkish testimony to Congress spurred traders to price a higher “terminal rate.”

The leading cryptocurrency by market capitalization fell to $21,871 during Asian hours, a three-week low, CoinDesk data shows. Ether, the second largest cryptocurrency, nearly tested Tuesday’s low of $1,535.

Powell said on Tuesday that the central bank is likely to raise interest rates more than previously expected, and warned that the process of pushing inflation down to the 2% target has a “long way to go.” Since last year, the Fed has raised interest rates by 450 basis points (bps), which has boosted risk assets, including cryptocurrencies.

In response to Powell’s hawkish comments, traders of Fed Funds futures lifted their forecasts for the peak or terminal rate to 5.65% from around 5.47% early this week and 4.9% a month ago. In other words, traders now expect continued tightening over the coming months, with the central bank raising interest rates by at least 100 basis points before it takes a day.

A closer look at Fed Funds futures reveals that traders have priced in a “higher for longer” approach by the Fed. Fed funds futures are derivative contracts widely used by traders to express their view of where the official interest rate will be at the time of expiration of the contract.

As can be seen from the function diagram, October futures currently represent the terminal rate, which implies a maximum borrowing cost of 5.65%. A month ago, June futures represented the peak yield of 4.9%.

“You can see the peak in the curve is in the October contract now. Last week it was the September contract. It’s a reflection of the higher for longer trend,” Geo Chen, macro trader and author of the popular Substack-based newsletter, Fidenza Macro, told CoinDesk.

If that’s not enough, the market now sees a 70% chance that the Fed will raise interest rates by 50 basis points later this month, a re-acceleration of tightening after a brief 25 bps dip in February. The yield on the two-year government bond, which is sensitive to interest rate expectations, has passed above 5% for the first time since 2007 and could rise further towards 5.655, taking into account terminal interest pricing.

Rising interest rates/yields weaken the attraction of risk assets and may make it difficult for bitcoin to maintain current valuations, as QCP Capital listed. The Singapore-based trading firm said last month that bitcoin has yet to see the last leg of the bear market that could see prices bounce back, if not break below the November low of $15,480

However, Chen does not see rising returns leading to a large sell-off in risky assets.

“I don’t see stocks and crypto as being very vulnerable to selling anymore since there’s already been so much discounting and discounting,” Geo Chen, macro trader and author of the popular Substack-based newsletter, Fidenza Macro, told CoinDesk. “My long-term bias is that risk assets will trend higher as we return to a disinflationary regime. However, this could take a few months.”