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Bitcoin ‘nuke’ warning as Fed rate hike decision looms — dollar index hits 20-year high

Bitcoin 'nuke' warning as Fed rate hike decision looms — dollar index hits 20-year high

Bitcoin (BTC) underwent a weak rebound on Sep. 21, and the U.S. dollar jumped to a new yearly high as investors await today’s Federal Open Market Committee’s interest rate decision.

BTC price hold $19K ahead of Fed decision

BTC’s price has managed to cling on to $19,000 with a modest daily gain of 1.33% . Meanwhile, the U.S. dollar index (DXY), which measures the greenback’s strength versus a pool of top foreign currencies, rose to 110.86, the highest level in twenty years.

BTC/USD vs. DXY daily price chart. Source: TradingView

FOMC rate hike scenarios

The Federal Reserve is poised to discuss how far it could raise its benchmark lending rates to curb record inflation. Interestingly, the market expects the U.S. central bank to hike rates by 75 or 100 basis points (bps).

The ramification of higher interest rates will likely result in lower appetite for riskier assets like stocks and cryptocurrencies. Conversely, the U.S. dollar will serve as the go-to safe haven for investors escaping risk-on assets.

“There seems no reason for the Fed to soften the hawkishness shown at the recent Jackson Hole symposium, and a [0.75 percentage point] ‘hawkish hike’ should keep the dollar near its highs of the year,” analysts at ING told the Financial Times.

Independent market analyst PostyXBT argues that a 100 bps rate can “nuke” Bitcoin below its current technical support of $18,800. He also suggests that BTC has a good chance of recovery if the rate hike turns out to be lower than expected, or 50 bps.

These speculations echo general rate hike expectations. John Kicklighter, the chief strategist at DailyFX, notes that a 50 bps rate hike would be bullish for the U.S. benchmark stock market index.

Nonetheless, a 100 bps rate hike would be extremely bearish for the S&P 500. This could be equally problematic for Bitcoin, whose correlation with stocks has been consistently positive since December 2021.

FOMC policy decision scenarios for DXY and SPX. Source: John Kicklighter/DailyFX

Polls expect a 75 bps rate hike

The U.S. economy suffered two back-to-back quarters of negative growth. Moreover, its manufacturing PMI pointed to the slowest growth in factory activity since July 2020. Meanwhile, the 2-year…

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