Source: Adobe
Bitcoin (BTC) price is rising on Wednesday amid a dovish reaction in traditional asset markets to the Federal Reserve's latest policy announcement.
BTC was last up 3.2% on the day, trading in the upper $42,000 range, with bulls eyeing a near-term retest of the yearly highs in the upper $44,000 range seen earlier in the month.
As expected, the Fed left interest rates at their multi-decade high of 5.25-5.5% on Wednesday.
The Fed predicts slowing inflation, slowing growth and a weaker labor market – scope for rate cuts?
However, the central bank's quarterly economic and interest rate forecasts showed the bank expects inflation to fall further next year, giving it scope to start cutting rates.
More specifically, the Fed forecasts that personal consumption inflation (PCE) will fall to 2.8% by the end of this year and 2.4% by the end of 2024, not far above its 2.0% inflation target.
Meanwhile, a continued slowdown in the economy (from a growth rate of 2.6% in 2023 to a growth rate of 1.4% in 2024) and a slight further weakening of the labor market to an unemployment rate of 4.1% compared to the current 3, 7% forecast.
According to the latest “dot plot” (a summary of each Fed policymaker's expectations for the level of interest rates in the coming years), slowing inflation, slowing growth and a weaker labor market will give the central bank room to start cutting interest rates next year – the median forecast of policymakers predicts three 25 basis point rate cuts by the end of 2024, while no policymaker forecasts higher interest rates.
Fed announcement pumps up easing bets
From a financial (and crypto) market perspective, the Fed's recent policy announcement has added to the narrative that easier financial conditions (and more liquidity) are ahead in the US, driving the decline in US yields, the US dollar and explains the rise in liquidity-sensitive US stocks and crypto.
The CME's Fed Watch tool, which monitors U.S. interest rate futures markets to estimate the implied likelihood of future interest rate moves, most recently had the possibility of the Fed starting to cut interest rates to nearly 75% in March, up from about 40% a year ago Day.
Interest rate futures markets also now have a more than 60% chance that the Fed has cut rates by at least 150 basis points by the end of 2024, up from around 20% a day ago.
What's next for Bitcoin (BTC) price?
At current price levels of $42,800, Bitcoin is now on the verge of reclaiming 50% of its recent mini-drop from December 8's yearly highs around $44,700.
Bitcoin (BTC) four-hour chart / Source: TradingView
Analysts widely attributed this pullback, most of which occurred on Monday, December 11, and saw BTC fall as low as $40,180, to a mix of profit-taking and the crushing of overly greedy bulls through the leverage of the BTC futures market, to drive the price up.
But conditions in the futures market suggest less excessive upside – according to Coinglass, the interest-weighted funding rate of leveraged Bitcoin futures positions was last at a healthier but still bullish 0.016% compared to recent highs above 0.035% on December 9th .
This creates the conditions for a more sustainable short-term price increase with a lower risk that leverage cancellation leads to short-term price declines.
Short-term price predictions are likely to remain optimistic as Bitcoin is currently driven by expectations of a short-term Fed easing cycle, optimism about institutional adoption with spot Bitcoin ETFs apparently nearing approval in the US, and other themes such as: B. benefits 1) the halving of the Bitcoin issuance rate in April 2024 and 2) the possibility that a more pro-cryptocurrency president will be elected in 2024.
This doesn't even mention the recent bullish technical developments, which will likely encourage chart-oriented traders to continue buying or betting on further upside.
Bitcoin's dip-buying-fueled rally following its recent retest of the psychologically important $40,000 level, where its 21DMA was also located, is a strong indicator of robust demand and exactly the type of technical price action seen during a bull market would be expected.
Bitcoin (BTC) daily chart / Source: TradingView
The next major upside target remains 2022 highs at $48,200.
It remains to be seen whether the “Santa Rally,” which has already lifted Bitcoin by over 13%, can continue through the end of the year (and could extend to nearly 30% if Bitcoin were to end the year at $48,000).
But the price risks certainly seem to be pointing to the upside.
Bitcoin (BTC) weekly chart / Source: TradingView
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