US dollar recovers, Bitcoin holds $20,000 as Fed decision nears

Bolstered by rising stocks and a fluctuating US dollar, bitcoin has held its position above $20,000 since Tuesday. It’s a key resistance level last hit in early October, but the looming central bank decision and rising dollar could end bitcoin’s pullback.

Traders are eager to see bitcoin’s bailout continue. The largest digital currency was hovering around $20,600 on Thursday morning after approaching $21,000 earlier in the day. The S&P 500 and Nasdaq opened lower, losing 0.2% and 1.4%, respectively.

“Bitcoin behaves like a commodity,” said Nick Saponaro, CEO of blockchain Divi Project. “Like gold, it is a store of value that has utility. So there is demand for it regardless of what happens in the macroeconomic environment.”

After the US dollar sank to a three-week low earlier this week, the currency showed signs of recovery on Thursday, with the US Dollar Index (DXY) up 0.5%. Bitcoin’s rally came in tandem with the dollar’s decline, as a weakened currency fuels risk appetite among investors, according to analysts.

“Gold rose 0.65% on the back of a weaker dollar and continued declines in yields amid the broader dovish pivot in central bank policy expectations,” said Tom Essaye, founder of Sevens Report Research.

“There are early signs that both the dollar and rates are starting to roll over, but until we have more definitive evidence that both are actually topping out, it would be premature to call a bottom in gold,” he said.

Bitcoin, like gold, has traded sideways for months, producing uncharacteristically low volatility – the value of the world’s oldest currency in continuous use, the British pound, was almost as volatile. The digital currency’s volatility compared to the Nasdaq and S&P 500 indexes hit a two-year low earlier this week, according to data from research firm Kaiko. Any significant movement in either direction would be expected to bring volatility expansion.

Inflation and global liquidity

While stock market volatility is beginning to ease — the VIX has dipped below 30 in the past five days — economists remain concerned about global liquidity.

“After more than a decade of abundant liquidity and relative calm in markets, central bank interest rate hikes to curb inflation have been accompanied by increased market volatility,” International Monetary Fund analysts wrote in a note on Thursday. “Measures of market liquidity have deteriorated across asset classes, particularly in recent weeks, as increased uncertainty about the economic outlook and monetary policy made investors much less risk-averse.”

The European Central Bank is still focused on bringing down inflation in the eurozone and, as last month, raised primary interest rates again by 75 basis points on Thursday. In September, inflation in the euro area reached 9.9%, according to the ECB.

The Federal Reserve is scheduled to meet next week and make an interest rate decision on Tuesday. Futures markets are currently pricing in a 91.8% chance that the central bank will choose a 75 basis point hike, according to data from CME Group. Cryptos and stocks will benefit from a slowdown in the upswing, whether it comes in November or December.

“Markets have rallied around the idea that the worst of the global rate hikes is either one, already behind us, or two, about to be behind us,” Essaye said.

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