The crypto market is up today and Bitcoin, Ethereum and numerous altcoins all rallied after United States Federal Reserve Chairman Jerome Powell suggested that December could see the start of smaller-sized interest rate hikes.
Crypto and equities markets responded positively to Powell’s Brookings Institute speech in which he mentioned promising developments with inflation leading to softer rate hikes.
Generally, the crypto market is still reeling from FTX’s recent bankruptcy, but Bitcoin’s price reacted positively by rallying to an intraday high at $17,191, while traders are still warning of a final capitulation in BTC price.
With volatility still likely, some analysts believe the bottom is still not in for the crypto market and BTC on-chain losses hit record highs.
The picture for the rest of Q4 remains muddy with the official Federal Reserve meeting on Dec. 3, while some analysts still expect 2022 to copy the 2018 bear market. At the same time, there is hope that this bearish trend will be gone for good by the start of 2023 with lower inflation and lower rate increases.
Let’s examine three of the major factors influencing crypto market strength on the day.
gPowell’s statement suggests progress is being made with high inflation
High inflation has been a year-long problem and back-to-back negative CPI reports have given the Fed multiple reasons to continue raising rates. After the CPI data boosted Bitcoin upward of $1,000 in minutes on Nov. 10, further positive data and Powell’s speech may have confirmed that inflation has peaked.
If inflation were to level off, Powell's suggestion of smaller hikes in subsequent months would likely result in boosted sentiment from market participants. Powell noted:
“It makes sense to moderate the pace of our rate increases as we approach the level of restraint that will be sufficient to bring inflation down. The time for moderating the pace of rate increases may come as soon as the December meeting.”
December’s Federal Open Market Committee (FOMC) is currently expected to yield a hike of 25 to 50 basis points, not the usual 75 basis points, according to CME Group’s FedWatch Tool.
Fed target rate probabilities chart. Source: CME Group
Powell cautioned that aggressive monetary policy would continue saying:
“Despite some promising developments, we have a long way to go in restoring price stability”
Bitcoin analysts celebrate Powell’s speech
While Bitcoin still has risk events that can impact the price, BTC futures are showing traders switch from majority short to long. According to Coinglass, 51.91% of traders are long Bitcoin at a ratio of 1.08 compared to BTC shorts.
Bitcoin long versus short ratio. Source: Coinglass
In October, Bitcoin’s volatility even fell below that of some major fiat currencies, making BTC look more like a stablecoin than a risk asset. But November has been a different story after FTX’s failure.
A look at the Bitcoin historical volatility index (BVOL) shows volatility has settled around 2.49.
Charles Edwards, the founder of crypto asset management firm Capriole was quite bullish on the news.
While Bitcoin price has been impacted by the endless flow of negative news, today’s rally shows a flash of bullish sentiment.
The dollar continues to cool off
After a parabolic uptrend throughout 2022, the U.S. dollar index is now beginning to show signs of cooling off.
The U.S. dollar index (DXY) recently hit its highest levels since 2002, and momentum may have cooled after the recent CPI and PPI print showed the Fed making some progress with run-away inflation. In a perfect world, investors would ideally view a retracting DXY as a reason to increase sentiment for risk assets like cryptocurrencies.
In the meantime, DXY is under pressure and its descent came in lockstep with a return to form for Bitcoin and altcoins. Historically, a cooling DXY is followed by Bitcoin price moving in the opposite direction.
BTC/DXY comparison. Source: TradingView
Overall, crypto markets are likely to continue seeing price whipsaws and most analysts agree that there are plenty of volatile days ahead.
While the positive news of easing rates is providing a nice short-term bump in crypto prices, Powell’s ultimate decision in December will be the true determinant of which direction the market chooses to take.