Bitfinex Alpha | BTC faces volatility risk as 25 bps rate cut expected

Bitcoin has staged a robust recovery, surging over 15 percent from its recent low of $52,756, supported by a significant uptick in Bitcoin ETF inflows. Over the past week, BTC ETFs recorded $403.9 million in net inflows, reversing a prolonged period of outflows and signalling renewed investor confidence in the asset. This rally has been driven predominantly by aggressive buying in spot markets. In contrast, the futures and perpetual markets have seen less pronounced movements, suggesting that the current price increase is grounded in genuine capital inflows rather than speculative leverage, providing a more sustainable foundation for the rally.

However,​​ BTC now faces critical resistance levels between $60,500 and $61,000, which have been pivotal since early March. While ETF inflows remain strong, there are signs of a potential stall as Spot CVD  – the difference between buy and sell orders across exchanges – has flattened over the weekend. We see the potential for market volatility this week as quite  high, driven by investor anticipation of the Fed rate cut decision. Whether the cut is 25 or 50 basis points, it could sway market sentiment between bullish optimism and cautious de-risking. Meanwhile, Bitcoin’s correlation with equities is intensifying, suggesting that movements in traditional financial markets could increasingly impact Bitcoin’s price. Bitcoin has also decoupled from gold, which reached a record high last week, indicating a shift in investor preference towards traditional safe-haven assets amidst a risk-averse environment.

In general, asset prices continue to be driven by the inflation outlook, which saw further cooling in August, with the Consumer Price Index rising just 0.2 percent for the month and 2.5 percent year-on-year, driven by notable drops in energy, used car, and gasoline prices. There is slightly stronger core inflation, which we believe will make the Fed more cautious about rate cuts, and we expect a smaller 25 basis point cut, rather than a more aggressive 50 basis point reduction. 

These developments come amidst a cooling labour market, with stable jobless claims, indicating that while the economy is decelerating, it has not reached a point of distress. This backdrop of moderate inflation and stable labour market conditions reinforces the need for the Fed to act preemptively with rate cuts, cautiously easing its policy stance. Improved consumer sentiment, highlighted by the University of Michigan’s Consumer Sentiment Index reaching a four-month high, reflecting optimism that has been fuelled by the easing inflation numbers and the knock-on effect of enhanced purchasing power. As the Fed considers its next move, the balance of risk is tilting towards protecting jobs, encouraging business investment, and unlocking cash flows.

The main crypto news last week was the significant move by the UK to introduce a pioneering bill that officially recognizes digital assets as personal property, under British law. This development confirms the UK’s status as a frontrunner in global cryptocurrency legislation. In contrast, the highly anticipated presidential candidate debate between Trump and Kamala Harris left many in the crypto community disappointed, as it failed to address any issues related to taxation or regulation of cryptocurrency markets.

Have a great trading week!

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