Bitcoin extended its retreat from its weekly high of $ 32,960 on Wednesday as the focus of the market shifted to the first meeting of the Federal Open Market Committee in 2021.
The flagship cryptocurrency fell to an intraday low of $ 30,818, a decrease of around 5.5 percent from the opening rate. The appetite for riskier safe havens weakened against a stronger US dollar and rising 10-year US Treasury note yields, causing declines in bitcoin and gold markets.
Bitcoin forms a 50-200 death cross on its 4H card ahead of the FOMC meeting. Source: BTCUSD on TradingView.com Bitcoin is forming a 50-200 death cross on its 4H chart ahead of the FOMC meeting. Source: BTCUSD on TradingView.com
Market participants will see Jerome Powell briefed on the Federal Reserve’s assessment of the economic outlook, fiscal stimulus and future taper. Based on its future forecast, Bitcoin traders can determine their medium- and long-term prospects as the cryptocurrency has been increasingly correlating with US markets since the crash in March.
Here are the three things to keep in mind at the Wednesday meeting.
# 1 economic recovery
Since Fed officials ended their last 2020 meeting in December, new data has been piling up showing that the U.S. economy is in a weaker state than before. These include an increase in unemployment claims and a decrease in retail sales, both of which indicate a slower-than-expected recovery despite the monetary tools available.
Even so, the prospects for a better recovery in the U.S. economy in the second half of 2021 have improved due to the introduction of COVID-19 vaccines. This could lead Mr Powell to adopt a wait-and-see strategy while maintaining the existing policy tools.
Market participants also expect the Fed chairman to provide clearer indications of the near-term outlook – and whether or not he believes the economy will recover more quickly in the second half of the year. Any positive outlook from him would have a negative impact on Bitcoin – and vice versa.
# 2 Bitcoin versus Taper Tantrum
Investors fear that the Fed may consider scaling back monetary support to financial markets in 2021 if it sees a robust economic recovery.
The worry comes from a small number of regional Bundesbank governors who rocked bond markets in early January by speculating that the US Federal Reserve would wind up its $ 120 billion monthly asset purchase program.
However, based on Mr. Powell’s earlier comments on the matter, the Fed is not going to stop prematurely supporting its perpetual bond buying strategy. Ken Taubes, Amundi’s chief investment officer for the United States, says the economic environment will improve by this year’s summer and fall seasons.
“The heat in the kitchen is getting pretty hot for the Fed,” he added, expecting Mr. Powell to buy the bond if the upswing persists.
Withdrawal from buying short-term debt would boost returns and make it attractive for mainstream investors to redistribute their riskier assets in the bond market.
Bitcoin and gold do poorly when government bond yields rise.
# 3 New Dovian members
The likelihood of the Fed coming back from January’s meeting is higher due to a new set of voting members in the FOMC.
The annual rotation has included Thomas Barkin from Richmond, Mary Daly from San Francisco, Atlanta Fed President Raphael Bostic, and Charles Evans from Chicago to the committee.
According to Kathy Bostjancic, chief US financial economist at Oxford Economics, the new members are largely reluctant. This means the US Federal Reserve would be less likely to deviate from its highly accommodative approach.
This, in turn, could work in favor of Bitcoin, which is benefiting from lower bond yields and quantitative easing measures.