Has the cryptocurrency market bottomed out?

The current European energy crisis may force the Federal Reserve to reverse its monetary policy tightening regime. However, with inflation showing no signs of abating, the cryptocurrency market may still struggle to recover significantly.

Has the market bottomed out?

From the smallest retail investors to the biggest hedge fund managers, this is the big question on everyone’s mind right now. The city of macro signals and technical indicators makes it difficult to understand what exactly is going on in the economy in general, let alone in the faster moving crypto market.

Several major technical indicators have given buy signals over the past few weeks, reinforcing the idea that the cryptocurrency market may have bottomed. How the crypto market reacts to macroeconomic news is worth considering. A major shift occurred after June CPI data hit a new high. Many market participants expected the crypto to start a new decline after this news. However, the opposite happened. Since the release of the CPI, the crypto has been trading higher, frustrating any late short selling attempts. Likewise, Wednesday’s 75 basis point interest rate hike and yesterday’s negative GDP growth paradoxically pushed the crypto higher, indicating that the market may now have “integrated” the current downward economic trend.

But even though market participants have stopped worrying about the general macroeconomic situation, that doesn’t mean there aren’t more pain coming. The fact is that inflation is still very high and the Fed is determined to bring it down to an acceptable level. Although Fed Chairman Jerome Powell said after Wednesday’s hike that he was “it becomes appropriate to slow down the pace of increase“he also left the door open for an increase”even more important” If necessary. The ongoing increases, combined with a short sale of Treasuries and Fed mortgage-backed securities, will tighten money flow and almost certainly put a damper on risky assets like crypto.

The other major macroeconomic problem is the cost of energy, especially in Europe. The war in Ukraine and the subsequent boycott of Russian energy have exacerbated already alarming global inflation rates. Winter is coming and there is a real possibility that many European countries will not have the necessary energy, and certainly not at a price that the average citizen is willing to pay. If the embargo against Russian oil and gas continues, Europe will have to rely on the US for its energy supply in the coming months.

In recent months, the euro has weakened significantly against the dollar, helped by interest rate hikes and monetary tightening by the Fed. At the same time, it seems likely that European nations will have to buy American energy to power their economies, putting the United States in a difficult position.

The US has two options: take steps to strengthen the euro against the dollar by injecting liquidity into the European economy, or allow European countries to default due to rising energy costs. Remember that many European countries and the European Central Bank hold foreign exchange reserves of US debt, which means that if they default, the US economy will also suffer.

Therefore, the Fed may have to stop its monetary policy tightening to avoid a catastrophe in Europe. Currently, there is a window in the winter where the US can continue to raise interest rates. However, Europe will soon reach a breaking point and the Fed will be forced to ease some of the pressure by halting or reversing its current monetary policy, which will weaken the dollar.

Can the market go down before the Fed is forced to pivot? It will be difficult for the crypto to make new lows anytime soon, given the huge amount of leverage that saw bitcoin fall below $18,000. But we could certainly revisit these levels if the macroeconomic situation worsens.

Leave a Comment