The price of Bitcoin (BTC) experienced a decline of 2% on Friday, dropping from around $43,000 to the low $42,000s. This dip can be attributed to hawkish comments made by John Williams, a prominent US Federal Reserve policymaker and president of the New York Federal Reserve.
Shift in Monetary Policy
During an appearance on CNBC’s Squawk Box show, Williams expressed his view that it is “premature to even be thinking about” rate cuts. This statement marks a significant departure from the more dovish stance taken by Fed Chair Jerome Powell at the recent policy announcement. The Fed’s latest projections also anticipate falling inflation in 2024 and three rate cuts.
Powell had previously suggested that interest rates had likely reached their peak and hinted at potential rate cuts in the future. These dovish remarks resulted in a surge in the US stock market, a decline in US government bond yields, and a drop in the US Dollar Index (DXY). Bitcoin also experienced a rally during this time.
Fed’s Realization and Future Outlook
However, Williams’ comments on Friday indicate that the Fed has recognized the miscommunication that occurred during the dovish market reaction to Powell’s statements. Williams emphasized that the Fed’s primary focus is on determining whether policy measures have reached a sufficiently restrictive level to ensure inflation returns to the target of 2%. He also stated that the Fed must be prepared to implement rate hikes if necessary.
This aligns with the message the Fed had been conveying to the market for most of 2023 before the unexpected dovish shift. In light of this communication hiccup, Fed officials may attempt to push back against the market’s dovish expectations, as evidenced by Williams’ recent comments.
It is worth noting that the market’s anticipation of interest rate cuts in March next year is primarily dependent on the upcoming Core PCE inflation reports from the US, rather than the immediate commentary from the Fed.
The bears have regained control in response to the hawkish sentiment from the Fed, causing a dip in the BTC price to the low $42,000s. This puts Bitcoin in the middle of the $40,000-$44,000 range observed earlier this week and represents a 6% decrease from its yearly highs of around $45,000.
Looking ahead, long-term price predictions for Bitcoin remain bullish. The expected approval of spot Bitcoin ETFs in 2024 is likely to encourage institutional adoption, while the upcoming Bitcoin issuance rate halving in March and the potential easing of US financial conditions through Fed rate cuts contribute to a positive outlook. However, with the optimism surrounding spot Bitcoin ETFs already factored into the market and no major news expected in the coming weeks, coupled with the conflicting messages from the Fed causing uncertainty regarding the timing of future rate cuts, BTC faces the risk of additional short-term setbacks.
Bears will closely watch the 21DMA support level at around $40,900 and this week’s lows, just above $40,000, to determine if they can hold. Failure to do so may result in a further dip to $38,000, which previously served as a strong resistance zone and coincides with the presence of the 50DMA. On the other hand, long-term Bitcoin investors who are less responsive to short-term market fluctuations may seize the opportunity to acquire BTC at a price lower than $40,000.
