(Kitco News) – Bitcoin (BTC), the broader cryptocurrency market, and stocks trended higher in early trading on Tuesday as Wall Street’s expectations that the Fed could cut interest rates by 50 bps now stand at 63%, according to the CME FedWatch Tool.
The size of the rate cut has been the focus of intense debate over the past week as the data has been somewhat mixed but clearly shows that inflation continues to moderate towards the Fed’s 2% goal, while the American consumer is showing resilience despite grappling with a higher cost of living.
“Investors have been thrown off balance by the sudden change in expectations about the likely size of tomorrow’s rate cut,” said David Morrison, Senior Market Analyst at Trade Nation. “Last Wednesday, following a relatively benign CPI update, the probability of a 25 basis point cut stood at 87%. But comments from former New York Fed chief Bill Dudley led to a large and unexpected shift in expectations, as he expressed his support for a larger rate reduction. The CME’s FedWatch Tool is currently assigning a [63%] probability of 50 basis points, while the likelihood of the smaller cut has shrunk to [37%].”
“It is extremely rare to go into a Fed meeting with such a high level of uncertainty,” he noted. “It’s usual to see probabilities in the mid-nineties favouring a particular outcome. This means there is likely to be considerable volatility after the announcement, and this could be compounded by the simultaneous release of the FOMC’s quarterly Summary of Economic Projections which includes the ‘Dot Plot’. This shows what individual FOMC members are forecasting for the Fed Funds rate for the rest of this year and beyond.”
“With investors currently predicting up to 125 basis points of cuts for this year, and a Fed Funds target of 3% by the end of 2025, there’s a risk that the Dot Plot will indicate a big disparity between investor expectations and the FOMC,” Morrison warned. “If so, Fed Chair Jerome Powell will have to be on top form during his subsequent press conference to dampen down any turmoil.”
While the size of the rate cut is uncertain, the fact that Wall Street sees a 100% chance that a rate cut is coming has helped provide a boost to risk assets, including Bitcoin, which rallied above $60,000 as bulls look to recover the ground lost since Sunday.
BTC/USD Chart by TradingView
The focus on a potential 50 bps rate cut has some analysts concerned that the Fed sees something worrying in the economy that they are trying to get out ahead of without spooking investors, prompting some to look closer at both Bitcoin and gold as wealth protection in the event of an economic recession.
“The current macroeconomic trends have triggered a major distinction between Bitcoin and Gold,” said Maruf Yusupov, co-founder of the Deenar gold-backed stablecoin project. “While Bitcoin has dropped as low as $57,578.35 amid an intense burst of volatility, the price of gold has maintained a positive growth to $2,579.21.”
“The reasons for this Bitcoin trend are not far-fetched and are hinged on the uncertainty surrounding the potential Interest Rate cut from the US Federal Reserve,” he noted. “Despite the potentially positive prospect of this cut for the broader market, investors are still cautious of general uncertainty.”
“The price and valuation trends of Bitcoin and gold over the past month have shown a widened correlation between both assets,” Yusupov suggested. “While Bitcoin has fallen by more than 3% in the past month and over 21% from its All-Time High of $73,750.07, Gold has risen over the past month. The precious metal even retested a new ATH of $2,589 over the past month, with its value up by more than 3% in the trailing 30-day period.”
“Another major trend between both assets is the slump in their key ETF products over the past month,” he added. “Investors are majorly taking bets to preserve their capital at a time when there are signs of economic turmoil. The limited volatility of gold has made it an attractive alternative in the push to hedge against the underlying uncertainty.”
“This pivot has seen the Bitcoin ETF product shed off the intense capital recently, with BlackRock surprisingly joining the outflow trend,” Yusupov said. “Other risk-on crypto assets have also not been spared from this capital exodus. Though it is too soon to claim that traditional investors are moving toward gold, the market data generally favors this theory.”
“For now, the two assets have decoupled from each other, further strengthening the decoupling both assets have showcased in the past few weeks,” he concluded.
At the time of writing, Bitcoin trades at $61,278, an increase of 5.9% on the 24-hour chart.
