While monetary easing benefits risk assets, the Federal Reserve’s (Fed) first rate cut of this cycle may be an exception. Markets are going through a delicate moment as fears of a US recession have resurfaced. Investors are keenly aware of any signals that their positions may need to be adjusted, and in some cases, this continued monitoring of macroeconomic data has led some to overreact, leading to price swings. Bitcoin could be the next victim and be dragged to $40,000.
The Federal Reserve (Fed) is facing a tricky balancing act. Markets are sensitive, and a small event can be magnified. For example, U.S. manufacturing data released Monday sent stock markets to their worst session since Black Monday, Aug. 5, the last time recession fears gripped markets. However, the macroeconomic data on the state of manufacturing was not dire, and neither was the resulting price action.
Therefore, as that date approaches, the Fed must assess what is more favorable to the U.S. economy, whether it is a 25 basis point cut or a 50 basis point cut, and, furthermore, You need to think about the message you want to convey. In general, quarter-point moves have predominated in this restrictive cycle and exiting it with an “out of the ordinary” decision could upset investors.
“A 25 basis point cut could indicate the start of a typical easing cycle. […]. On the other hand, a more aggressive 50 basis point cut could generate an immediate price increase effect. [del bitcoin] and then cause a correction due to growing recession concerns,” cryptocurrency exchange Bitfinex said in its weekly market analysis report.
One of the points highlighted by the report is that the price of Bitcoin is increasingly correlated with those of traditional risky assets, like the S&P 500 price, and therefore more exposed to macroeconomic data. For this reason, a more aggressive Fed could run into bitcoin and the usual reaction to rising stock markets or cryptocurrencies to monetary flexibility.
Bitcoin is now trading at 56,660 points, 30% below the March highs, which are also the all-time high. Over the past seven days, amid uncertainty about economic weakness, the asset has lost 6%. Bitfinex estimates that a half-point reduction by Jerome Powell and his team could lead to a further correction, between 12 and 30%, and place the cryptocurrency between $40,000 and $50,000.
“Historically, September has been a volatile month for bitcoin, with an average return of -4.78% and a peak-to-trough decline of 24.6%. This volatility, combined with the potential “sell the news” reaction following the rate cut, presents risks and opportunities for investors,” the same report notes.
The downside is that the monetary body chooses to cut 25 basis points and that would be positive for the crypto market, as eyes would be more focused on the Fed easing, a return to more accommodative interest rates and an increase in liquidity.
