After a massive rally of over 42% in the last ten days, Bitcoin is currently stagnating below the $28,000 mark, due to the upcoming Federal Open Market Committee (FOMC) meeting of the US Federal Reserve (Fed).
As seen before previous FOMC meetings, the Bitcoin market is moving to a risk-off strategy ahead of the Fed’s release of the new policy rate. Tomorrow, Wednesday, the March rate decision will be released at 2 pm EST, before Fed chair Jerome Powell steps in front of the cameras for the FOMC press conference at 2:30 pm EST.
Expectations have changed massively in recent days, and are also seeing almost hourly shifts. At press time, there was a 17% probability of a pause and an 83% probability of a 0.25% increase in the U.S. federal funds rate, according to the FedWatch tool.
More important, however, will be Jerome Powell’s forward guidance and how the dot plot, and thus the estimated terminal rate, will evolve. For the first time this year, the Fed will publish the dot plot, which will provide great insight into the Fed’s view, especially in light of the further deepening banking crisis.
Bitcoin Scenarios For The FOMC Meeting
Co-founders of on-chain analysis firm Glassnode, Yann Allemann and Jan Happel, write in their latest analysis that the Bitcoin market is well positioned for the FOMC. According to the Glassnode co-founder, the Bitcoin risk signal shows a bullish structure similar to the one seen in March-April 2020 and summer 2021.
According to the analysts, the market is already set for a 25 basis point rate hike, so the market should not react too aggressively if the Fed continues to raise rates. However, if the Fed does pause, the analysts “expect a strong upside move.”
In terms of the options market, the analysts explain that the price dynamics between puts and calls indicate that demand for calls has increased significantly despite Bitcoin’s break below $28,000. “Notice the low 1-month 25D skew indicating more expensive (higher demand) calls with respect to puts.”
However, the Glassnode co-founders also warn, “However, implied and realized volatility have increased and TradFi shows signs of cautiousness,” noting that robust buy and sell walls have formed around $25,500 and $30,000, respectively.
The biggest risk, they note, is the number of long positions opened in the perpetual market between $27,000 and $28,000, which could lead to liquidations.
According to Eight Global founder and analyst Michaël van de Poppe, Bitcoin still looks like it is about to roll over and is showing a slight distribution pattern. According to him, there are two scenarios for the FOMC meeting.
Sweep above recent high to $28,800 through FOMC and then sharp drop [or] losing $27,000 and continuing the fall to $25,000. I’m interested at $23,300 and $25,000 for dips.
Charlie Bilello, chief market strategist at Creative Planning, said in his latest tweet that the 2-year Treasury bond yield is now below 4%. A week ago, it was above 5%. This is the sharpest 5-day decline in yields since the October 1987 crash, so he concludes:
Market is calling the Fed’s bluff on further tightening after next week’s FOMC meeting. Fed Funds Futures: 1 more hike, then rate cuts.
In general, traders should be cautious about betting on a pivot as early as March. At every single FOMC since March 2022 Jerome Powell has said: “the job is not finished”, “will continue to increase rates “and “history warns about loosening prematurely”. Yet leading into the FOMC, some market analysts say that “this one he will pivot.”
Still, a surprise is not out of the question. Goldman Sachs predicts that the FOMC will pause at its March meeting this week because of stress in the banking system and then proceed with three more 25 bps hikes in April, May and June.
The Base Scenarios
The following base scenarios could therefore be considered. In a max hawkish case, the Fed hikes by 25 bps and the dot plot shows a hike to 525-550. Neutral can be classified if the Fed hikes by 25 bps and leaves the final target unchanged at 500-525.
Neutral would also be if the Fed does not hike in March and leaves its final target unchanged at 500-525. This would mean that the Fed has two rate hikes ahead – March and April.
Dovish, on the other hand, would be if there is no hike and the Fed lowers its terminal target to 475-500, which would mean that there is likely to be only one rate hike left (March). Maximum dovish would be no hike and leaving the target rate at current levels.
Both of the latter scenarios could trigger a strong rally, with Bitcoin rising towards $30,000. At press time, the BTC price was at $27,628, facing the resistance zone above $28,300.
Featured image from iStock, chart from TradingView.com