Will Bitcoin’s Price Rally After Federal Reserve Rate Cut?

View

• Bitcoin has dived out of a narrowing price range and may see a deeper drop if key trendline support near $10,120 is breached.
• Acceptance below $10,120 would expose the recent low of $9,855.
• Some notable observers believe the decline may be reversed following Wednesday’s Federal Reserve rate cut, although historical data suggests otherwise.
• On the higher side, $10,956 (Aug. 20 high) remains the level to beat for the bulls.

Bitcoin is down again, but some observers believe the losses could be reversed after a U.S. interest rate cut expected Wednesday.

The leading cryptocurrency by market value fell to lows below $10,100 yesterday, marking a downside break of the narrowing price range created near $10,300 in the three days to Sept. 15.

As of writing, BTC is changing hands at $10,150 on Bitstamp, representing a 1.4 percent drop on a 24-hour basis.

So, the bears have gained an upper hand in the last 24 hours despite record high miner confidence, and a deeper drop may unfold in the next 24 hours.

The decline, however, could end up trapping sellers on the wrong side of the market, according to some observers, who expect BTC to benefit from an impending 25 basis point U.S. rate cut on Wednesday.

For instance, Nigel Green, founder and CEO of a global financial advisory giant deVere Group, believes the cryptocurrency will pick up a strong bid in response to the Federal Reserve’s rate cut, as the reduction in borrowing costs will lower the yield (return) on the U.S. dollar.

Meanwhile, Anthony Pompliano, founder and partner at Morgan Creek Digital Assets, tweeted in August that BTC could fly high if the Fed rate cuts are followed by a government buying program (quantitative easing).

Former Wall Street Journal trader and journalist Max Keiser also believes the Fed’s continued monetary easing would send bitcoin to $100,000.

Rate cuts are inflationary in nature, meaning they reduce the purchasing power of fiat currencies.

Hence, there is a general consensus in the crypto market that Federal Reserve’s monetary easing will bode well for bitcoin, which is deflationary in nature and is set to undergo a mining reward halving (supply cut) in less than a year.

Bitcoin, however, has seldom taken cues from the Fed’s actions in the past. For instance, the Fed hiked rates by 25 basis points in December 2015. That was the first hike since 2006. The central bank delivered another rate hike in December 2016 and hiked rates four times in 2017.

Even so, BTC broke into a bull market with a convincing move above $300 at the end of October 2015 and went on to hit a record high of $20,000 by December 2017.

As such, the probability of BTC responding positively to tomorrow’s rate cut is debatable.

Also, traditional markets have priced in a 25 basis point rate cut and the FX markets will likely dump the U.S. dollar only if the Fed cuts rates by 50 basis points or signals aggressive easing over the near term. In that case, the anti-dollar sentiment may feed into the crypto markets.

Daily and 4-hour charts

Bitcoin fell to $10,060 on Monday, signaling a downside break of the narrowing price range of the back-to-back inside bar candlesticks, as discussed yesterday.

As of now, prices are sitting on the ascending trendline support at $10,120. A break lower would further strengthen the bear grip and allow a deeper drop to $9,855.

On the higher side, the bearish lower high of $10,956 created on Aug. 20 remains the level to beat for the bulls.

That level could come into play if the rising trendline support fuels a price bounce above $10,458 (Friday’s high).

The probability of a downside break is high as last week’s falling wedge breakout on the 4-hour chart (above right) failed to draw bids. In fact, the breakout ended up creating another bearish lower high at $10,458.

Disclosure: The author holds no cryptocurrency assets at the time of writing.

Fed Reserve image via Shutterstock; charts by Trading View