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The direction of Bitcoin price is once again in the hands of the Federal Reserve, according to a new analysis. This comes after excitement around Bitcoin ETFs faded.
Bitcoin's price movements are being driven by broader conversations about interest rates, CoinShares, a European digital asset manager, said in a report published today.
“A closer examination of the last 40 trading days reveals increasing alignment with interest rate expectations for June,” wrote CoinShares Research Manager James Butterfill. He noted that a similar trend was observed in 2023.
According to CME Fedwatch, the market is confident that interest rates will remain stable in June, with a potential decline only in the 4th quarter of this year. Core Personal Consumption Expenditures (PCE) inflation, which excludes food and fuel, the Fed's preferred inflation measure, remained stubbornly flat at 2.8% in March, well above expectations.
On the other hand, GDP growth figures were disappointing, recorded at 1.6% in the first quarter of 2024, compared to 3.4% in the previous quarter.
The data also shows that growth in the manufacturing and service sectors contracted and stagnated, respectively. These measurements are fueling fears of stagflation and raising expectations that the Fed will keep interest rates higher for longer. In response, Bitcoin's price dropped below $57,000 heading into the Fed's next meeting on May 1, CoinShares explains.
However, the central bank also announced a “dovish surprise” with plans to reduce quantitative tightening (QT) while maintaining the policy rate above 5.25%. That means slowing the pace at which the economy shrinks its dollar supply by reducing its balance sheet by $25 billion a month instead of the previous rate of $60 billion.
In theory, this is good for Bitcoin and other risky assets that have previously thrived in easy-money macro environments, according to the analyst. Bitcoin's price rose above $60,000 shortly after the Fed's announcement.
“Tightening the QT while simultaneously keeping front-end rates high can be likened to both braking and accelerating a car,” Butterfill wrote. Butterfill added that the US Treasury may be reaching its limit in paying its short-term debts and that a change in the FED's QT strategy is the only remaining option.
Butterfill expects the Fed to cut interest rates later this year in response to weakening economic data, and that the cut will likely be “later but larger than expected.” The analyst said the following about BTC:
“Thanks to Bitcoin's fixed supply and high immutability, when the Fed eventually lowers interest rates, this turbulent situation is likely to support Bitcoin prices.”
*This is not investment advice.