The Bitcoin (BTC) price has experienced a surge on Wednesday in response to the US Federal Reserve’s recent policy announcement. BTC is currently up 3.2% and trading above $42,000, with bullish investors anticipating a near-term retest of yearly highs achieved earlier this month.
The Federal Reserve, as expected, has decided to maintain interest rates at the historically high level of 5.25-5.5%. However, the central bank’s economic and interest rate projections have indicated that they anticipate a decline in inflation next year, providing room for potential interest rate cuts. The Fed’s forecast shows a drop in personal consumption inflation (PCE) to 2.8% by the end of this year and 2.4% by the end of 2024, slightly above its 2.0% inflation target. Additionally, the Fed projects a slowdown in economic growth, from a 2.6% rate in 2023 to a 1.4% rate in 2024, accompanied by a softening labor market with an unemployment rate of 4.1% compared to the current 3.7% rate.
“Slowing inflation, easing growth, and a softening labor market will give the central bank room to start cutting interest rates next year.” – Source
According to the latest “dot plot,” which summarizes individual Fed policymakers’ expectations of future interest rates, several policymakers project three 25 bps rate cuts by the end of 2024, with none forecasting higher interest rates. This projection suggests that the central bank is preparing to implement an easing cycle.
From a financial and cryptocurrency market perspective, the Fed’s policy announcement reinforces the notion of easier US financial conditions and increased liquidity. This has resulted in a drop in US yields, a weakened US dollar, and a surge in liquidity-sensitive US stocks and cryptocurrencies.
“The latest Fed policy announcement signals the potential for easier US financial conditions and increased liquidity, which explains the drop in US yields and the pump in liquidity-sensitive US stocks and crypto.” – Source
Market indicators, such as the CME’s Fed Watch Tool, which monitors US interest rate futures markets, suggest a higher probability of future interest rate cuts. The tool currently indicates a close to 75% chance of the Fed initiating interest rate cuts in March.
“The chances of the Fed starting to cut interest rates in March are close to 75%.” – Source
Bitcoin’s current price of around $42,800 signifies its retracement of 50% from the recent pullback it experienced from the yearly highs of $44,700. Analysts associate the pullback, which occurred on December 11th and saw BTC drop as low as $40,180, with profit-taking and a correction among overly optimistic investors using leverage in the BTC futures market.
However, conditions in the futures market indicate a decrease in excessive bullish sentiment, which lowers the risk of leverage-induced price dips. This sets the stage for more sustainable short-term price growth.
Near-term price predictions remain positive for Bitcoin, as it continues to benefit from expectations of an upcoming Fed easing cycle, the potential approval of spot Bitcoin ETFs in the US, and other factors such as the Bitcoin issuance rate halving in April 2024 and the potential election of a pro-crypto President in 2024. In addition, recent bullish technical developments are contributing to the optimistic outlook among chart-focused traders.
Bitcoin’s bounce from the psychologically significant $40,000 level, along with its 21DMA support, indicates strong demand and aligns with typical price action during a bull market. The next major upside target is the 2022 highs in the $48,200 range. While it remains uncertain whether the current “Santa Rally” will continue until the end of the year, price risks are certainly tilted towards the upside.
“Price risks for Bitcoin are currently tilted towards the upside, with the next major target being the 2022 highs in the $48,200s.” – Source
