As the Fed’s interest rate decision approaches, Bitcoin consolidates and waits for a rate cut signal

Tuesday’s U.S. inflation data came in line with expectations, which could be good news for cryptocurrency prices, however, a day before the Federal Reserve announces its final interest rate decision of the year tomorrow , Bitcoin and Ethereum still fell slightly, with Bitcoin hovering around $41,000 and Ethereum just below $2,200.

In the altcoin space, Solana also cooled on Tuesday after rising more than 22% in three days earlier this month. Driven by the airdrop of governance tokens by Jito, a liquidity staking protocol based on Solana last week, Jito's JTO initial offering price was $1.20, up 261% last week, and fell to around $2.92 on Tuesday.

Profit Taking

According to data from Glassnode , cryptocurrency holders sent $2 billion in Bitcoin to exchanges, the highest daily amount since the Terra crash. Funds sent to exchanges indicate that traders are preparing to sell their assets.

CryptoSlate analyst James Straten noted that the broad sell-off signals a profit-taking mentality among traders.

James Butterfill, head of research at investment firm CoinShares , said the price action suggests this is “more of a technical pullback” than a shift in broader market sentiment.

Butterfill explained that the correction was not surprising due to the sharp price increase in December and the relative strength index (RSI) being above 70. The RSI is a tool used to measure the short-term momentum of the market. When it is above 70, the market is considered overbought, while below 30, it is considered oversold.

Leverage Adjustment

Crypto market consolidation could also be due to a leverage adjustment. Noelle Acheson, author of the Crypto is Macro Now newsletter, wrote that this “can be painful, but is usually good news.”

Last week, cryptocurrency futures markets flashed warning signs that leveraged speculation had gone a bit too far, meaning traders were increasingly speculating with borrowed funds.

“We can see this in the funding rate, which is the fee traders pay to hold a long or short position in crypto perpetual futures,” Acheson said.

She added that Bitcoin funding rates surged on Saturday to their highest level since November 2021. The same month, when Bitcoin prices hit an all-time high of around $69,000, the surge in funding rates led to the selling and liquidation of leveraged long positions, a common phenomenon in the cryptocurrency market.

Noelle Acheson analyzed: "Usually, once the dislocation is digested, prices will resume their previous trends. These declines can be seen as a healthy cleanup of excessive leverage. In fact, Bitcoin financing rates have now returned to more normal levels, and the driving force for Bitcoin and other currencies remains strong."

Positive macro outlook

Data released by the Labor Department showed that the U.S. inflation rate in November was in line with expectations. The overall inflation rate rose by 3.1% year-on-year and 0.1% month-on-month. Although prices in the United States are still rising, the pace of increase has slowed, and the Federal Reserve's fight to raise interest rates to fight inflation may be coming to an end. Deflation may pave the way for the central bank to start cutting interest rates next year.

The trading market expects at least two rate cuts in 2024. Goldman Sachs believes that the first rate cut will take place in the third quarter of next year.

CME's FedWatch tool shows that the probability of a rate cut on March 24 is 40%.

Rate cuts could support further gains for Bitcoin and cryptocurrency prices, as risk assets generally perform better in a low-interest rate environment.

Market watchers will be closely watching Federal Reserve Chairman Jerome Powell's speech on Wednesday for any hints about future moves. Any dovish comments from the central bank chief could push markets higher on growing hopes of a rate cut.

Traders expect the Fed to keep interest rates unchanged and update its forecasts to set rates at 4.876% by mid-2024. Analysts say if all goes according to plan, it should push up risk asset prices.

Caleb Franzen, founder of Cubic Analytics, posted on X : “Deflation is in full swing, and the latest round of CPI data for November 2023 further proves that this trend is intact.”

“It is widely expected that a pause in rate hikes could be interpreted as a bullish signal for the market,” Bitfinex analysts said in an emailed note. “Cryptocurrencies have previously experienced positive market moves following the Fed’s decision to keep rates steady.”

"As long as Fed Chairman Jerome Powell doesn't sound too hawkish in his press conference, this outcome could spur a small rally in the market and could be key to continued gains into the year end," said Tom Essaye, founder of Sevens Report Research . "To be clear, this outcome doesn't bring anything new to the table, but it would remove the risk of a hawkish surprise and provide upward momentum to the market into the end of the year."