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The year 2023 has begun on a positive note with bitcoin (BTC), a pure play on the US dollar liquidity conditions, outperforming traditional risk assets with a 40% price gain.
The rally could be interrupted by a temporary price pullback as the Federal Reserve (Fed) President Jerome Powell is likely to stick to his his hawkish script during Wednesday’s post-meeting press conference, analysts told CoinDesk.
The Fed will begin its two-day meeting later today and announce its rate decision at 19:00 UTC on Wednesday. Powell’s press conference will follow the rate decision at 19:30 UTC.
Having raised rates by 425 basis points (bps) last year that included outsized moves of 75 bps and 50 bps, expectations are firmly centered on the Fed to slow the pace of tightening to 25 bps on Wednesday. In other words, a 25 basis point rate hike is priced in. The focus will be on whether Powell acknowledges the recent softening in inflation and economic activity, bolstering markets’ hopes for an early pivot toward easing.
The odds, however, are stacked against such an outcome, as the recent rally in stocks and bonds and the decline in the US dollar have eased financial conditions in the economy for the first time since April. That has dented the Fed’s effort to counter rampant price pressures in the economy with tighter credit standards.
“There is a strong possibility that in the press conference, Powell will be more hawkish and re-tighten financial conditions. For that reason, we could see a healthy short-term correction in crypto and all risk assets,” Nauman Sheikh, head of treasury at crypto asset management firm Wave Financial, said.
Sheikh added that the market has run ahead of itself in pricing the so-called Fed pivot despite repeated warnings by the Fed that rates will remain “higher for longer.”
Markets have been fighting the Fed since mid-2022, only to be met with a stern message by Fed officials. The recent decline in inflation expectations has only strengthened investor conviction that the central bank will soon end tightening and begin cutting rates later this year.
Chris Weston, head of research at Pepperstone, said financial conditions have loosened to a point where Powell may detail the extent of easing is “unwarranted.” That would push risk assets, including tech stocks and crypto, lower.
“At this juncture, it seems unlikely the Fed would want to appear dovish, so with the risk are for a hawkish Fed – albeit this is expected – and in a market where leverage funds are short USD (in the spot market), the risks are small skewed to USD upside, which by extension this means a lower Nasdaq and gold price,” Weston noted in a weekly market update.
Caution has seen into the market ahead of the Fed, boosting demand for short-duration put options or bearish bets.
“Weekly puts are popular for block traders, but there is no record of far-month put options trading,” Griffin Ardern, a volatility trader from crypto asset management firm Blofin, said.
Quick bull revival likely
The expected Powell-induced pullback could be short-lived, as the market has recently become resilient to hawkish Fed talk.
“I expect the Fed to raise funds rate by 25bp(already priced in) and send out Powell to talk all hawkish, but a barking dog never bites,” macro investor James Choi tweeted. “Market is forward-looking, and it will start pricing in a “PAUSE” in March, in which by the time the S&P 500 will be at 4500.”
“We wouldn’t be at 4,000 and financial conditions this loose if the market believed Powell in the first place,” Choi added.
Several Fed officials warned of higher rates early this month. Still, bitcoin managed to gain 40% this month, with more risky cryptocurrencies like gaming tokens staging bigger rallies.
The longer duration call-put skews, which measure the cost of bullish calls relative to puts, remain biased in favor of calls. “The reason for this sentiment in the market is that a 25 bps rate hike is basically priced in, and investors are more inclined to believe that Powell’s hawkish speech is a bluff,” Ardern told CoinDesk.