Bitcoin extended its decline from its weekly high of $ 32,960 on Wednesday as the market’s focus shifted to the first meeting of the Federal Open Market Committee in 2021.
The flagship cryptocurrency fell to an intraday low of $ 30,818, about 5.5 percent lower than its opening rate. The hunger for riskier havens weakened against a stronger US dollar and rising yields on US 10-year Treasury bills, driving declines in the bitcoin and gold markets.
Bitcoin forms a 50-200 death cross on its 4H chart ahead of the FOMC meeting. Source: BTCUSD on TradingView.com
Market participants are seeing an update from Jerome Powell on the Federal Reserve’s view of the economic outlook, fiscal stimulus and future windings. Based on his future guidelines, Bitcoin traders can determine their medium and long-term outlook given the cryptocurrency’s growing correlation with the U.S. markets since the March crash.
These are the three things to look at at the Wednesday meeting.
# 1 economic recovery
Since Fed officials concluded their last meeting of 2020 in December, new data has been piling up showing that the U.S. economy is in a weaker state than before. They include an increase in unemployment claims and a decline in retail sales, both pointing to a slower-than-expected recovery despite the available monetary tools.
Nevertheless, the outlook for a better US economic recovery in the second half of 2021 has improved thanks to the rollout of COVID-19 vaccines. That would be Mr. Powell to adopt a wait-and-see strategy while keeping their existing policy tools intact.
Market participants also expect the Fed chairman to provide clearer indications of the near-term outlook – and whether he believes in a faster economic recovery in the second half of the year. Any positive view from him would negatively impact Bitcoin – and vice versa.
# 2 Bitcoin vs Taper Tantrum
Investors fear the Fed could consider cutting back its monetary support for financial markets in 2021 if it expects a robust economic recovery.
The concerns come from a small number of regional federal bank governors who devastated bond markets in early January by speculating that the The US central bank would wind down its $ 120 billion monthly asset purchase program.
But based on Mr Powell’s earlier comments on the matter, the Fed will not stop prematurely backing its strategy of buying indefinite bonds. Ken Taubes, chief investment officer for the US at Amundi, says the economic climate would improve by the summer and fall of this year.
“The heat in the kitchen is going to be pretty hot for the Fed,” he added while expecting Mr Powell to wind down bond buying if the recovery continues.
Withdrawing from buying short-term debt yields would increase, making it attractive for regular investors to reassign their riskier investments to the bond market.
Bitcoin and gold fare poorly when treasury interest rates rise.
# 3 New Dovish members
The chances of the Fed coming out of January’s dovish meeting are higher because of a new batch of voting members at the FOMC.
The annual rotation has brought Thomas Barkin of Richmond, Mary Daly of San Francisco, Atlanta Fed president Raphael Bostic and Charles Evans of Chicago to the committee.
Kathy Bostjancic, the chief US financial economist at Oxford Economics, said the newcomers are mostly moderate. That means the US central bank would be less likely to deviate from its ultra-accommodative approach.
That, in turn, could work in favor of Bitcoin, which benefits from lower bond yields and quantitative easing policies.