FBS Analysts Foresee Downturn for Bitcoin as Federal Reserve Signals Key Rate Cut

FBS financial market analysts project a looming downturn for Bitcoin as the market players await the upcoming Federal Reserve’s key rate cut in 2024. This tendency signals the rising probability of the BTCUSD’s closing bullish trend, as rate hikes frequently influence risk assets such as Bitcoin.

The Federal Reserve’s key rate is a pivotal factor in determining the minimum interest rate for interbank lending, which plays a substantial role in shaping the financial landscape. Market participants have observed a correlation between the Federal Reserve’s key rate peaks and the decline of risk assets, including Bitcoin.

2017–2020 scenario

In the first half of 2019, while the US key rate was consolidating around its local maximum values, Bitcoin gained 370%, reaching 13,000 USD or 61.8 Fibonacci level following traders’ expectations of approaching rate cuts.

As the famous saying goes: “Buy the rumors, sell the news.” The actual situation turned out to be the opposite. As soon as the rates started to decline, the BTCUSD entered a bearish trend. This shift occurred because, in times of deteriorating macroeconomic conditions and slowing economic growth, central banks typically reduce key rates. In such situations, individuals, hesitant to invest in risky assets, opt to sell them and secure their capital to avoid financial constraints. The trend played out in March 2020, when the Federal Reserve announced an emergency 100-bps rate cut in response to the economic impact of COVID-19, BTCUSD experienced a 50% decline.

The Fed’s move was aimed at saving and boosting the economy. Of course, the overall plan worked, and later, many investors turned to Bitcoin as a potential hedge against inflation, pushing the price to the moon. However, the decline of the crypto market in early March 2020 whipped many traders out of the market.

2021–2024 scenario

In 2023, the Federal Reserve continued increasing interest rates. Over 16 months starting in March 2022, the rates were raised by 525 basis points, reaching a high position 5.25%-5.5% in July, which was the highest level over the past 22 years.

Contrary to the opinion that such rate hikes would dampen the demand for risky assets like cryptocurrencies, Bitcoin’s value increased. Especially after the Fed announcement of a pause in rate hikes in September 2023 as markets started to price in an upcoming rate decline.

BTCUSD, weekly timeframe

Looking at the 2024 chart and analyzing it in the same way, traders can notice many similarities with the 2017-2020 market conditions. The Fibonacci Retracement gives further indications that the price movement follows that exact scenario. BTCUSD reached the same 61.8 Fibonacci level of around 49,000 USD, and bounced off. At the same time, markets anticipate an upcoming rate cut by the Federal Reserve. Hence, the market setup looks similar to the previously observed Bitcoin’s behavior.

Given the similarity of the patterns, FBS financial market analysts expect the price to decline toward the 36,000 USD target after the first Fed rate cut of 2024. Moreover, if BTCUSD loses this support, it may drop to 31,000 USD and even 25,000 USD support levels.

Conclusion

This scenario is noteworthy, yet it frequently goes unnoticed. During each cycle, there is an anticipation in the markets that a key rate cut by the Federal Open Market Committee (FOMC) will have a positive effect on the prices of risky assets such as Bitcoin. However, one should grasp the fundamental aspect: a key rate cut typically occurs when the economy is stagnating, and growth is decelerating, leading to panic selling and the disposal of risky assets.

Disclaimer: This material does not constitute a call to trade, trading advice or recommendation and is intended for informational purposes only.

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