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03.05.2023 12:00 PM
Bitcoin holds $28k ahead of Fed meeting: what to expect next?

Over the past few days, investment activity around cryptocurrencies and, specifically, Bitcoin has decreased significantly. There is a clear predominance of bears, which continue to push the price to local lows. All this is happening against the backdrop of a deteriorating macroeconomic situation.

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Bitcoin price movements over the past few days clearly show that the market is preparing for the next Fed meeting. On the CME, the probability of a rate hike to 5.25% increased to 86%. Given the strength of the labor market and inflation at 5%, the Fed will make a difficult decision that will hurt BTC in the short term.

Aggravation of the banking crisis

At the same time, in the medium term, another increase in the key rate will negatively affect the traditional banking system. Bitcoin has tested the $27.5k level against the backdrop of the approaching Fed decision. No less significant events took place in the U.S. banking sector, pointing to a growing crisis.

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The U.S. regional banks index showed a significant decline ahead of the Fed meeting due to liquidity issues at PacWest Bancorp and Western Alliance Bancorp. The companies announced a suspension of trading shares and preparation for bankruptcy filings.

There is also a significant outflow of investor funds from other regional banks ahead of the Fed meeting. Depositors are transferring capital to large national banks, which indicates a growing distrust in the traditional banking system.

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Among the main beneficiaries of the outflow of funds from regional banks was JPMorgan, which actively provides its clients with services for investing in cryptocurrencies. In addition to indirect investments, direct investments in BTC are also growing, as evidenced by the correlation of the asset with gold.

Final key rate hike?

Global markets, including the cryptocurrency one, have adapted to the increase in the key rate and compete with each other for limited investment volumes. At the same time, not all areas successfully operate in conditions of limited liquidity. The situation in the U.S. banking system is a direct proof of this.

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The labor market is also gradually weakening, which may push the Fed to complete the rate hike cycle. Financial markets believe that there will be a pause in rate hikes for the next two months, and in September, the rate will be reduced by 0.25%. Markets expect a rate of 3% by early 2024.

BTC/USD Analysis

As of May 2023, Bitcoin is emerging as a relative winner from the current crisis situation. We are seeing a significant weakening of the U.S. banking sector, the bankruptcy of new companies and the willingness of the authorities to compensate for losses. In such a situation, we should expect gradual injections into the banking sector.

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Given this, in the medium term, BTC and the cryptocurrency market will continue to be an important defensive asset in the current crisis. In the short term, we see an attempt by the bears to push the price to the key support level of $26.6k, where a lot of liquidity is concentrated.

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Increased volatility due to the Fed meeting helped sellers lower the price to $27.6k, but subsequently, bulls recovered the drop. It can also be argued that the large bearish candle on May 1 was a market reaction to the upcoming Fed meeting. Taking this into account, today should go smoothly if there are no additional triggers.

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The technical metrics of the cryptocurrency do not show a single trend, which is typical for periods of increased volatility. In the near future, the price of the asset will remain within the range of $27.7k–$29.9k, and the results of the Fed meeting will not fundamentally change the situation.

Conclusion

Bitcoin and the cryptocurrency market are approaching the next Fed meeting in favorable positions. The Fed's decision may have a short-term negative effect on cryptocurrencies, but in the medium term it will allow BTC and other assets to significantly increase investment potential.

Artem Petrenko,
Analytical expert of InstaForex
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