Let’s Focus on the Fed!
(Any views expressed below are the personal views of the author and should not form the basis for making investment decisions, nor be construed as a recommendation or advice to engage in investment transactions.)
In the past week, all eyes are shifting away from the Ukraine crisis, focusing more on economic data and rhetoric from the Fed.
Summary
Technical: BTC’s trading range has tightened even more this past week, with $43,000 short term resistance and $37,000 short term support
Markets: With the Fed’s decision to raise rates by 25 basis points and taking on a more neutral stance, we have seen slightly increased buying across the equities and crypto market
Macro: As the Fed raises rates to fight inflation, the 10Y-2Y treasury rate spread is approaching inverse territory, a signal of recession
Recommendation: The market still has not chosen a direction. Regardless of your viewpoint, we recommend increasing the upper and lower limits when using the grid bot and setting a medium number of grids based on your upper and lower range
Important News
- March 14: China initiated Covid lockdowns in crucial manufacturing areas, further intensifying global supply chain issues
- March 15: The ZEW indicator of economic sentiment in Germany plummeted 93.6 points to -39.3 points in March, the most significant drop ever recorded
- March 15: US PPI rose 10% in February, the highest annual increase on record
- March 16: The Federal Reserve approved a 0.25% interest rate hike
Bitcoin fell slightly over the weekend but remained up ~10% higher on the week. The cryptocurrency and equity markets performed well in reaction to the Fed’s first interest rate hike since 2018. The S&P500 is up ~5.6% while the Nasdaq is up ~8.8%, and ETH outperforming bitcoin is up ~14%.
At the start of the week, bitcoin moved up 7% in just 15 minutes, in what many thought was a manipulated move. This move caused nearly 50 million in short liquidations and 15 million in long liquidations. Then on Wednesday, the Fed came out with a widely expected 0.25% interest rate raise, and bitcoin reacted with a slight dip before reversing to the upside. In the press conference following the release Chairman Powell’s said, “We’re strongly committed to not allowing this higher inflation to become entrenched… The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge”. This rhetoric came with a neutral undertone; the Fed will keep the economy on watch and adjust policy depending on the labor market. After digesting the rate increase, bitcoin moved in a mildly bullish uptrend for the rest of the week.
Our View
With the conclusion of last week’s FOMC meeting, the whole market will be focused on guessing future Fed decisions and projections till mid-year. We can see lowered volatility in the options market as the market prices in the Fed’s guidance and several rate hikes for the year. With one major event out of the way and prices hardly changing, the market spring appears to be coiled. We expect bitcoin to remain in this $34,000 – $46,000 trading range, but a period of higher volatility seems to be on the horizon.
Recommendation
After the Fed decision, there seems to be more risk-on action in the markets. If you want to trade the broader range, we stick with the same recommendation as last week. Use the Grid Trading Bot with a lower range of ~$30,000 and an upper range of ~$50,000. It is beneficial to set the number of grids to 50 – 60 as we expect increased volatility in the near future. If you want to take advantage of the short-term trading range, you could use the Grid Bot with a tight range of ~$43,000 to ~$37,000 to capture the smaller intraday moves. Set a smaller amount of grids to balance out the number of transactions and the percent profit per grid. Remember to manage your risk. If bitcoin breaks under $30,000 meaningfully, we could see further downside.
Bitcoin’s daily volatility in the past 60 days is 4.03% compared to 3.96% last week. Its approximate average daily range remains unchanged at $2,200.
Technical Analysis
This week, we are watching the $43,000 resistance and the $37,000 support for short-term levels. Expect a move out of this trading range in the coming weeks as volatility is bound to come back. With the lack of action between the short-term and longer-term levels, $46,000 and $33,000 should act as magnets after bitcoin moves out of the short-term trading range.
For Ethereum, we see a breakout of its trendline that spanned from its peak in November. Ethereum began to outperform bitcoin as news of its merge on the Kiln test net was highly successful. This highly anticipated event would transition Ethereum into a proof of stake protocol, which many are dubbing Ethereum 2.0. With this new bullish sentiment surrounding Ethereum, it could see a quick move into its $3,150 long-term resistance.
Implied volatility in bitcoin and Ethereum options continued to trend lower after the FOMC meeting. This decrease can be partially attributed to traders unwinding their option hedge positions after the Fed event. However, when option implied volatility has spent time between 60% – 80% zone, it is usually followed by periods of increased volatility. We can see this trend in the May selloff, July short squeeze, and October move back to all-time highs.
Future Outlook
According to our analysis, the market can be divided into two periods for the rest of this year in terms of Fed decisions.
Conjecture phase:
The whole market will be focusing on guessing Fed’s decisions and projections till mid-year.
Greed phase:
Investors will have a higher risk appetite by trading on the potential results of the Fed’s cut decisions from June to December.
March could be full of tailwinds for cryptocurrencies due to the Fed’s slight 0.25% rate hike, entirely within market expectations. The month of April and May could have decreased volatility because there will be no clear decision or Fed projection. Both sharp rate hikes and rate cuts could be reasonable, and the Fed will use its rhetoric to lead the market. For June and September, significant volatility will come to the center stage. There could be strong headwinds as the Fed usually rolls out significant policy changes in this particular period. After September, things will be much easier because the Fed’s projections and policy outlooks should be straightforward by then.
Recession Risk
The 10-year and 2-year Treasury bond spread are generally considered an advanced indicator in the economy. Yield curve inversion occurs when longer-term yields fall much faster than short-term yields, implying a surge in demand for long-term Treasury bonds. An inverted yield curve has been viewed as a potential economic recession indicator.
At writing, the 10Y-2Y spread is approaching the critical recession zone.
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