bitcoin

Bitcoin ‘nuke’ warning as Fed rate hike decision looms – Dollar index hits 20-year high


Bitcoin (BTC) suffered a weak rebound on September 21 and the US Dollar hit a new yearly high as investors await today’s Federal Open Market Committee interest rate decision.

BTC Price Holds at $19,000 Ahead of Fed Decision

The price of BTC managed to hold onto $19,000 with a modest daily gain of 1.33%. Meanwhile, the US Dollar Index (DXY), which measures the strength of the greenback against a set of major foreign currencies, hit 110.86, its highest level in two decades.

BTC/USD vs DXY daily price chart. Source: Trading View

FOMC Rate Hike Scenarios

The Federal Reserve is poised to discuss how much it could raise its benchmark lending rates to curb record inflation. Interestingly, the market expects the US central bank to hike rates by 75 or 100 basis points (bps).

The ramification of higher interest rates will likely lead to reduced appetite for riskier assets like stocks and cryptocurrencies. Conversely, the US dollar will serve as a safe haven for investors fleeing risky assets.

“There doesn’t seem to be any reason for the Fed to tone down the hawkish stance exhibited at the recent Jackson Hole symposium, and a [0.75 percentage point] “hawkish rise” should keep the dollar near its highs for the year,” ING analysts told the Financial Times.

Independent market analyst PostyXBT claims that a rate of 100 bps can “nuclearize” Bitcoin below its current technical support of $18,800. It also suggests that BTC has a good chance of recovery if the rate hike turns out to be below expectations of 50 basis points.

These speculations echo general expectations of higher rates. John Kicklighter, chief strategist at DailyFX, notes that a 50 basis point rate hike would be bullish for the benchmark US stock index.

Nonetheless, a 100 basis point rate hike would be extremely bearish for the S&P 500. It could be just as problematic for Bitcoin, whose correlation with equities has been consistently positive since December 2021.

FOMC Policy Decision Scenarios for DXY and SPX. Source: John Kicklighter/DailyFX

Polls predict a 75 basis point rate hike

The US economy has suffered two consecutive quarters of negative growth. Additionally, its manufacturing PMI indicated the slowest growth in factory activity since July 2020. Meanwhile, 2-year US Treasury yields rose above 10-year US Treasury yields, charting a yield.

Related: What’s next for Bitcoin and the crypto market now that the Ethereum merger is complete?

These measures sound the alarm of an impending recession. But that data is offset by unemployment data at record lows and housing start rates still above their $1.35 million danger zone, according to data presented by Charles Edwards, founder of Capriole Investments.

Total new private dwellings started. Source: Fred

Normally, recession warnings cause the Fed to pivot. In other words, to reduce or suspend hiking rates. But Edwards notes that the central bank will not pivot since the US economy is technically not in a recession.

“Until the main concerns about the recession emerge, until it hurts where it matters – jobs – there is no reason to expect an urgent change in policy. from the Fed here,” he wrote, adding:

“So it’s business as usual until we have proof that inflation is under control.”

Most economists, 44 of 72 polled by Reuters, also predict the Fed would raise rates by 75 basis points at their September meeting. Therefore, Bitcoin could avoid a deeper correction if it maintains its correlation with the S&P 500, based on Kicklighter’s outlook.

Bitcoin at $14,000 next?

From a technical standpoint, Bitcoin could drop to $14,000 in 2022 if a drop below its current support level of around $18,800 triggers a head-and-shoulders breakdown.

Daily BTC/USD price chart with head and shoulders pattern pattern. Source: Trading View

Conversely, a bounce off the $18,800 support could see BTC price rise to $22,500 as an intermediate upside target, a 16.5% upside from the price of BTC. ‘today.

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