Crypto falls as investors weigh persistent inflation and interest rate hikes

Bitcoin rallied toward $29,000 on Wednesday as traders pondered the likelihood that interest rate cuts by the Federal Reserve may be further away than they thought.

The price of bitcoin was last down around 3% to trade at $29,202.54, while ether fell 5% to $1,977.28.

The drop comes after ether rallied 12% over the past week and pushed above $2,000 for the first time since August. That helped boost bitcoin by 8% to over the $30,000 mark.

“We think the pullback we’re seeing is more a function of a delayed correction after some impressive moves and possible profit-taking on a broader risk flow in global markets than anything crypto-specific,” said Joel Kruger, market strategist at LMAX Group.

Investors on Wednesday morning took in new UK inflation data, which showed that consumer prices unexpectedly held above 10% in March. It fueled expectations that the Bank of England could raise interest rates by 25 basis points at its meeting in May.

Meanwhile in the US, Atlanta Federal Reserve President Raphael Bostic said on Tuesday that he expects a further 25 basis point rate hike and then a hold “for quite some time.” Bostic spoke to CNBC’s “Squawk on the Street.”

“There have been some signs that the Fed may be more aggressive on higher interest rate policy than the market is pricing in, which has driven yield differentials in the US dollar’s favor while weighing on sentiment,” Kruger said.

Market participants had expected a decline in crypto prices this week as investors shifted attention away from Ethereum’s latest technical upgrade and toward the potential for the Fed to push the economy into a recession with its interest rate hikes – giving bitcoin another testing ground at a time when investors only warming to the diversity of the crypto asset’s potential.

Clara Medalie, head of research at crypto data provider Kaiko, noted that liquidity in the crypto market remains low after the US lost two of its biggest fiat-to-crypto ramps in the banking crisis earlier this year – the networks provided by Silvergate and Signature Bank.

“Overall, volatility to both the upside and downside can be expected due to a prolonged bout of thin liquidity in crypto markets, which has hit bitcoin and ether particularly hard,” she said. “It’s hard to count on any crypto rally with the market liquidity, so a sharp drop to the downside is hardly a surprise.”

Traders also digested Tuesday’s contentious congressional hearing with Securities and Exchange Commission Chairman Gary Gensler, who defended the agency’s crackdown on cryptocurrency trading platforms and failed to provide a clear answer on whether ether is a security. Gensler has long argued that all crypto assets other than bitcoin should be considered securities.

Investors are watching another congressional hearing Wednesday, this time on the House Financial Services Committee’s stablecoin bill.