The degree of volatility or price turbulence in Bitcoin (BTC) remains subdued, consistent with the calm in US stock and bond markets. According to some crypto traders, the low volatility regime will likely continue after the FED interest rate decision. Here are the details…
All eyes on FED for Bitcoin volatility
The Fed will announce its interest rate decision on Wednesday at 21:00 ET, accompanied by a statement, Summary of Economic Forecasts, and a new “dot plot” of interest rate forecasts. Powell will hold a press conference in thirty minutes. The central bank has increased interest rates by 525 basis points since March 2022 to contain inflation, and the first phase of the tightening cycle has injected volatility into liquidity-dependent crypto and traditional markets.
The central bank on Wednesday is expected to keep its benchmark borrowing cost steady at 5.25% to 5.5% and not present any surprises to the market, maintaining its long-favored data-driven stance, according to Greg Magadini, director of derivatives at Amberdata. Rate traders see a close to 100% chance that the Fed will keep rates steady on Wednesday. Greg Magadini, director of derivatives at Amberdata, said in a note to clients on Monday:
The Fed has been very determined to remain ‘data driven’ and has signaled its ability to ‘keep rates higher for longer’. To me, this means the Fed could keep rates unchanged at this week’s FOMC meeting, but could signal that rates will remain high while monitoring economic statements. I think this will make the FOMC [Fed] meeting a low volatility event.
Interest rates are critical
The Fed has repeatedly argued that its future course of action on interest rates depends on how inflation and employment develop, and has refused to signal a complete end to the rate-hike cycle that began in March last year. In this period when inflation is starting to recover, the Fed is expected to repeat the same message on Wednesday. Additionally, markets that have become accustomed to rapid rate cuts over the past four decades could make things even more complicated for the central bank by pricing in a renewed loosening of liquidity if the Fed signals that the tightening cycle is over.
In other words, the central bank is unlikely to surprise hawkish or dovish, supporting the current low volatility regime in bitcoin and traditional markets. “We doubt this [volatility] will come from the Fed itself,” Singapore-based crypto trading firm QCP Capital said. “Towards the last three meetings of the year, we expect the appetite within the FOMC to increase again will be extremely low. “At the same time, given rising pump prices and rebounding inflation, we don’t see how Powell can put a definitive end to this boom cycle,” he said.
BTC options expiring
Bitcoin options expiring this Friday, which covers the Fed and Bank of Japan (BOJ) meetings, indicate that these interest rate decisions may not be the event. Options are derivative contracts that give the buyer the right, but not the obligation, to buy or sell the underlying asset at a predetermined price at a later date. It is common for currency traders to look at options to gauge potential post-event volatility in the underlying asset.
“Based on Bitcoin options market pricing, traders expect BTC to move only 2.8% this Friday, a sign that no one is expecting a market-moving comment from Chairman Powell,” said Markus Thielen, director of research and strategy at crypto services provider Matrixport. ” said. “Bitcoin in 2023 only rose 1% shortly after the FOMC meetings and rose +3% a week later,” Thielen added.
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