As investors increased their exposure to the U.S. dollar, the benchmark cryptocurrency suffered along with risk-on markets.
Bitcoin (BTC) prices briefly fell below $44,000 on Thursday as the United States Dollar strengthened after the U.S. Federal Reserve policy minutes revealed its intentions to limit its bond-purchasing program this year.
Bitcoin could become a new resistance with a $45,000 risk
Spot BTC/USD rates fell 1.71% to $43,955 a new low for the week. After a price rally of 64.42%, the pair fell to $48,176.
The latest Bitcoin price decline coincided with Wall Street’s similar market bias. During Wednesday’s closing hours, for instance, the benchmark S&P 500 index fell by 47.81 points or 1.1% to 4,400.27
The Dow Jones and Nasdaq Composite plunged similarly, by 0.9% and 1.1%, respectively. CNBC’s premarket data showed that futures tied with Wall Street indexes fell on Thursday. This suggests that markets will continue to decline after the New York opening bell.
On the other hand, the U.S. dollar index (DXY) benefited from declining risky markets. The index measures the strength of the greenback against a basket top foreign currencies and soared to 93.50 after six months, before falling by modest margins.
Alert for Tapering
The U.S. Federal Reserve’s July 27-28 meeting, released Wednesday, showed an emerging consensus to unwind its $120-billion monthly purchases of Treasury and mortgage-backed securities.
Most central bank officials agreed that the U.S. economic recovery is on the right path, which is an appropriate reason to reduce the pace of asset purchases. They did not specify when tapering should be initiated, as there are only three Federal Open Market Committee meetings remaining this year.
Officials also agreed that reducing asset purchases would allow them to increase interest rates if the economic recovery continues as expected. The minutes revealed that officials wanted to see more evidence that the labor force has rebounded from the effects of the COVID-19 epidemic.
On inflation, the minutes showed Fed officials anticipating a temporary burst. After excluding volatile food categories and energy, their preferred measure of inflation was 3.5% in June, a 30-year-high. However, they anticipated declines by calling the temporary rise in consumer prices transitory.
Bullish exhaustion ahead?
Excessive bond-buying led to U.S. yields dropping to 0.66% in 2020. The yields remained near their records lows despite a slight rebound at the start of 2021. The trend was the same across the globe, wherein the amount of debt offering negative yields recently stood at $16.5 trillion, a six-month peak.
A series of rotations have been seen in the equity market with indexes reaching record highs due to the lower rate of returns. The S&P 500 rose 19.01% year to date to hit a lifetime high of 4,480.26 point, while the Dow Jones rose 16.30% to reach an all time high of 35.369.87 points.
Bitcoin, which emerged as a safe-haven alternative to the U.S. dollar and gold in 2020, also rose alongside the Wall Street index. It has reached a record close to $65,000 in 2021. Analysts credit the Fed’s loose monetary policy as one of the key catalysts for its price rise.
The biggest question is whether tapering will allow capital to be rotated out of the markets. This was especially true for Bitcoin, which has risen over 1,000% since the Fed’s March 2020 loosening of policy.
Jon Ovadia, the founder of Ovex South Africa, noted that a decline in cash flow from Federal Reserve would likely stop the growth of Bitcoin and other risky assets in near future.
He explained that there are many factors that can support Bitcoin’s growth, and not just Fed interference.
Bitcoin investors will need to consider the potential impact on the macroeconomic side and hold on to the other fundamentals in order to maintain record-breaking prices.
Bitcoin will reach new record highs in Q1/2022
James Wo, CEO and founder of Digital Finance Group, described the recent price drops in Bitcoin and equity markets as “reactionary”. He stressed however that inflationary pressures would ensure that risk-on assets will continue to gain momentum long-term.
