Volatility of number one cryptocurrency calmed down by the mid-week in anticipation of the Fed's policy decision. BTC is consolidating within a narrow range between 20,000 and 20,700. However, the market might click into gear by the end of the day.
The Fed's policy meeting will be able to determine the crypto market's fate, bitcoin in particular, for the nearest weeks and months. In the recent weeks, financial markets have been alert to every word by the US central bank in an effort to predict its further policy moves.
At present, investors have no doubts that the Federal Reserve will raise the key interest rate by 75 basis points that will be the fourth sharp rate hike straight. However, analysts suggest two scenarios for the policy meeting in December.
In this context, market sentiment today will depend on the Fed's signals on possible moderation in the pace of rate hikes. For the time being, the market reckons a 50% chance of a rate hike by 75 basis points in December.
Hawkish or dovish tone?
Like at the previous meetings, Fed Chairman Jerome Powell will hardly drop a hint that a slower pace of rate hikes signals an earlier termination of monetary tightening or a lower-than-expected official funds rate.
Dovish signals could be related to a moderate rate hike by 50 basis points in December.
According to the Federal Reserve, the fact that the US slipping into recession is still a lesser evil than its inability to tackle high inflationary pressure.
The Federal Reserve is unlikely to encourage risky assets. Therefore, Jerome Powell will be unwilling to revise the Fed's rhetoric, dropping a hint about higher peak rates. He might want to stretch the time.
Economic calendar
Next week, market participants will take notice of the US inflation data which will be published on November 10. This week, apart from the Fed's policy meeting, the event of crucial importance is the US nonfarm payrolls with metrics on the labor market. It is due on November 4.
If the US CPI declines, it could be the sign that the Powell's policy is bringing fruit and just needs time to reach its ultimate goal. The labor market is healthy in the US, so Powell might have enough time until the policy obtains visible results.
Nevertheless, some analysts reckon that the labor market will cool down soon. The thing is that it is happening not as fast as market participants expect. The signs of slower employment could assure the Federal Reserve to ease the pace of rate hikes. Perhaps it will happen not in December but in February.
How Fed's decision to influence bitcoin
To predict how the crypto market, Bitcoin in particular, may react, it is useful to look at the past performance of Fed rate hikes. Historically, the BTC price has been extremely volatile before and after the announcement.
During the last rate hike in September, BTC fell 5% in a few minutes and then showed an unexpected rebound.
The consequences for the US dollar will be critical. In 2022, the main cryptocurrency shows a strong inverse correlation with the dollar index: when the US dollar index rises, Bitcoin falls, and vice versa.
For example, the BTCUSD's rally last week was caused by the fact that the dollar index (DXY) showed weakness. However, after falling last Wednesday, the dollar index rose, although it again bumped into local resistance. On Wednesday morning, the DXY showed a decline ahead of the announcement of the Fed's decision.
At the same time, gold rose more than 1% on Tuesday as the US dollar showed early signs of weakness. Bitcoin may follow suit.
Bitcoin is oversold more than average
Let's shift the focus away from the Federal Reserve toward the flagship cryptocurrency. Currently, bitcoin has plunged to the lowest levels seen before the bullish market of 2017.
Charles Edwards, the developer of Bitcoin Yardstick indicator and also the CEO of management consultancy Capriole, points out that the indicator is now at the lowest level in history.
As on-chain metrics converge to define a classic macroeconomic bottom for BTCUSD, a new metric suggests that Bitcoin is even more oversold than the average hodler believes.
Bitcoin Yardstick measures the ratio of the market capitalization of the main cryptocurrency to the hash rate, two fundamental indicators that, when compared with each other, provide a key insight into the price.
As Edwards explains, the lower the value, the "cheaper" bitcoin is — a higher hash rate is used to protect low-value coins.
Though he warns that this is "not investment advice," it matters a lot to potential buyers. Much of the unrealized value comes from the amount of work that has been done to secure Bitcoin supply during price declines.
Currently, the hash rate of the Bitcoin network is close to all-time highs, and the price is down about 75% from the last all-time high seen in November 2021.
"Today we are witnessing the second lowest value of the Bitcoin Yardstick in the history of the main cryptocurrency. This means that, relatively speaking, Bitcoin is extremely cheap, given the amount of energy used in the most powerful computer network in the world," Edwards commented.
