Bitcoin and Ethereum rallies have lost their momentum. Bitcoin and ETH prices have fallen by 4% in the last one hour alone. BTC has declined by over 6% in the last 24 hours and is currently trading at $21,934. Ethereum is trading at $1,751, down by over 7% in the last week.
The most recent crypto rally was a result of the latest Consumer Price Index. A less-than-estimated YoY increase of 8.5% CPI revealed cooling inflation. However, with Fed officials taking a hawkish stance, the crypto market can see new lows.
What Key Fed Officials Are Saying
Fed officials are taking a hawkish stance on the next month’s interest rate hike. St. Luis’s President, James Bullard, has given every indication of another 75bps take hike. He has made clear his intent to provide significant downward pressure on inflation.
Neel Kashkari, the CEO and president of the Minneapolis Federal Reserve is one of the most dovish Fed officials. However, even he expressed his urgency in controlling the “very, very high inflation”.
How The Fed Can Impact Crypto Market
The CPI is a strong indicator of inflation in the economy. Higher inflation is usually followed by quantitative tightening from the Federal Reserve as a measure to control inflation.
A three-quarters of a percentage point interest rate hike in June caused a bloodbath in the crypto market. Bitcoin had its worst financial quarter in over a decade. However, further high inflation data in the following month did not have a bad impact on the market.
The primary reason for this was the expectation that inflation has begun to cool. Moreover, the United States GDP showed negative growth for two consecutive quarters in a row. This meets the criteria of a technical recession. Many experts expected the Fed to reverse its hawkish stance given the macroeconomic conditions.
However, an bigger than unusual hike in September could cause a bloodbath, similarly to June.
“The rally that brought it back to $25,000 has lost considerable momentum and that could begin to weigh more heavily on the price” of Bitcoin. “A move below $22,500 may suggest the rally has run its course for now.”
On the other hand, crypto market analyst Lark Davis also points out that Bitcoin has lost “RSI uptrend, bearish MACD cross, losing 50 day EMA right now,” in the last 24 hours.
Bitcoin-Equity Correlation to Continue
Bitcoin and the broader crypto markets have been closely following the movements on Wall Street this year. Also, the current macro setup looks quite uncertain with fears of the impending recession still staying high.
The Fed is more likely to proceed with interest rate hikes in order to bring the soaring inflation under control. As a result, the equity market will continue to face the heat of the quantitative tightening measures. Jamie Douglas Coutts, senior market structure analyst at Bloomberg Intelligence, wrote:
“In the short term, correlation risks are heightened as equities, especially technology names, are delicately poised at key resistance levels”.
Another warning sign for Bitcoin investors is that the accumulation by long-term investors has slowed down a lot. Genesis’s Ainsley To, Marc Chan and Noelle Acheson wrote: “After a steady climb in the first half of 2022, the amount of Bitcoin that has not moved in over a year has leveled off, signaling a pause in the accumulation behavior of longer-term investors”.
Top cryptocurrencies like Bitcoin and Ethereum (ETH) are still trading at a 50% discount year-to-date. However, the relief rallies have seen anywhere between 50-100% jumps from their June bottoms.