Bitcoin Price Pumps As Dovish Fed Signals Three Rate Cuts in 2024 – Where Next for BTC?
The Bitcoin (BTC) price is pumping on Wednesday amid a dovish reaction across traditional asset markets to the US Federal Reserve’s latest policy announcement.
BTC was last up 3.2% on the day and trading in the upper $42,000s, with bulls eyeing a near-term retest of yearly highs printed earlier in the month in the upper $44,000s.
As expected, the Fed left interest rates on hold at the multi-decade high level of 5.25-5.5% on Wednesday.
Fed Forecasts Slowing Inflation, Easing Growth, Softening Labor Market – Room For Rate Cuts?
But the central bank’s quarterly economic and interest rate projections showed that the bank expects inflation to continue falling next year, giving them the room to start cutting interest rates.
More specifically, the Fed forecast personal consumption inflation (PCE) inflation to drop to 2.8% by the end of this year and 2.4% by the end of 2024, not far above its 2.0% inflation target.
Meanwhile, forecast a continued slowdown in the economy (from a 2.6% growth rate in 2023 to a 1.4% growth rate in 2024) and a slight further softening of the labor market to an unemployment rate of 4.1% versus the current 3.7% rate.
As per the latest “dot plot” (a summary of each individual Fed policymaker’s expectations as to where interest rates will be in the coming years), slowing inflation, easing growth and a softening labor market will give the central bank room to start cutting interest rates next year – the medium policymaker projection forecast three 25 bps rate cuts by the end of 2024, while no policymakers forecast higher interest rates.
Fed Announcement Pumps Easing Bets
From a financial (and crypto) market perspective, the latest Fed policy announcement fed into the narrative that easier US financial conditions (and more liquidity) lay ahead, explaining drop in US yields, the US dollar and the pump in liquidity-sensitive US stocks and crypto.
The CME’s Fed Watch Tool, which monitors US interest rate futures markets to gauge the implied probability of future interest rate moves, last had the chances that the Fed starts cutting interest rates in March at close to 75%, up from closer to 40% one day ago.
Interest rate futures markets now also imply a more than 60% chance that the Fed will have cut interest rates by at least 150 bps by the end of 2024, up from around 20% one day ago.
Where Next For the Bitcoin (BTC) Price?
At current price levels in the $42,800s, Bitcoin is now close to having retraced 50% of its most recent mini-pullback from the yearly highs it hit on the 8th of December around $44,700.
Analysts widely attributed that pullback, most of which occurred on Monday the 11th of December and saw the BTC drop back as low as $40,180, as down to a mixture of profit-taking and a wipe-out of overly greedy bulls using leverage in the BTC futures market to chase the price higher.
But conditions in the futures market are indicative of less overly excessive bullishness – as per Coinglass, the open-interest weighted funding rate of leveraged Bitcoin futures positions was last at a more healthy, but still bullish 0.016% versus recent highs on the 9th of December above 0.035%.
That sets the stage for a more sustainable short-term price rise with a lower risk of leverage wipeouts triggered short-term price dips.
Near-term price predictions are likely to remain bullish, with Bitcoin currently benefitting from expectations of a near-term Fed easing cycle, optimism about institutional adoption with spot Bitcoin ETFs seemingly on the brink of gaining approval in the US, and about other themes such as 1) the Bitcoin issuance rate halving in April 2024 and 2) the potential for a more pro-crypto President to get elected in 2024.
That doesn’t even mention recent bullish technical developments that are likely to encourage chart-focused traders to continue buying/betting on more upside.
Bitcoin’s dip-buying fuelled bounce from its recent retest of the psychologically important $40,000 level, where its 21DMA also resided, is a strong indicator of resilient demand and exactly the kind of technical price action that would be expected during a bull market.
The next major upside target remains the 2022 highs in the $48,200s.
Whether the “Santa Rally” that has already lifted Bitcoin over 13% can continue into the year’s end (and extend to nearly 30% if Bitcoin was to end the year at $48,000) remains to be seen.
But price risks certainly seem tilted to the upside.