Markets price 92.5% chance of rate increase Wednesday, but strategists warn a hold poses bigger shock
Bitcoin traders are reducing leverage and rotating capital into stablecoins ahead of the Federal Reserve’s rate decision Wednesday, bracing for volatility regardless of the outcome.
Markets are pricing a 92.5% probability of a Fed rate hike, the first in three years. Yet strategists are divided on which scenario poses the greater risk to crypto assets. Chris Sullivan, portfolio manager at Hyperion Decimus, said the bond market has already absorbed a hike into prices. “The bond market has done its job and fully priced in tomorrow’s hike,” Sullivan said. The clearer danger, he suggested, would be a Fed hold, which would signal policymakers see something markets do not.
Bitcoin has been range-bound between approximately $76,000 and $80,000 for 24 days. The cryptocurrency barely moved around the Fed’s July 2023 rate hike, when the decision was largely priced in beforehand. This time, traders are taking precautions.
Cooper Duschang, a research analyst at Talos, said the most visible shift has been into stablecoins. “The clearest shift has been into stablecoins. Investors appear to be reducing risk and holding greater liquidity ahead of the Fed,” Duschang said. Net buying tilt toward stablecoins stands at 28 percent, more than triple the 8 percent average observed around previous Federal Open Market Committee meetings.
Bitcoin buying conviction has fallen to 3 percent from 10 percent. Ether buying conviction dropped to 9 percent from 23 percent. Open interest in bitcoin futures and perpetuals remains below yearly average, indicating subdued leverage across derivatives markets.
Mark Connors, chief investment officer at Risk Dimensions, questioned whether rate hikes can address inflation driven by commodity shocks. Oil prices have risen more than 20 percent over the past five days, potentially adding inflationary pressure independent of monetary policy. Connors characterized the Fed’s approach as “using a pitchfork to bail out our boat of inflation.”
Fed Chair Kevin Warsh’s forward guidance on interest rate expectations is anticipated to be significant for Bitcoin’s next directional move. Bitcoin volatility has fallen to one-month lows, suggesting markets expect the announcement to break the current range.
