Too early for euphoria
Risk assets and crypto markets have digested a 75bps rate hike from the FOMC and surprised many by rallying with vigour
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Trading Note #3
What many thought was not possible actually happened. Whilst sentiment on crypto twitter was slightly despondent, the crypto markets rallied in the face of a 75bps rate hike. As enjoyable as the recent price action has been, Bitcoin bulls would be wise to temper their euphoria as ‘The Great Bear’ of 2022 is likely only taking a small rest before continuing its ravenous appetite of feasting on risk asset valuations.
Let’s quickly understand why the markets have rallied and see if there is any strength left to bid into or if a reversal is to be expected. Despite openly recognising economic growth is softening, the Fed unanimously decided to hike by 75 bps - it's all about fighting the flames of inflation.
But markets only started rallying convincingly when Powell went ahead and said the following, 'we are now at levels broadly in line with our estimates of neutral interest rates, and after front-loading our hiking cycle until now we will be much more data dependent going forward''.
Let's dive in and see what this means.
The neutral rate is the prevailing rate at which the economy runs at its potential - without overheating or excessively cooling down With this 75 bps hike, the Fed just reached its estimate of neutral rate - from here, they aren't contributing to economic overheating anymore.
This conveniently lines up with the US10Y yield where an incredibly exciting confluence of macro events start to unfold. Historically, whenever the US10Y crosses below the prevailing interest rate, the FED PIVOT gets activated and as we stand now there is only a 28 bps spread between these two forces. I would love to hear from our discerning readers what they think will happen.
Now on to some analysis where a potential short term bull case can be made. As mentioned in our Trading Note yesterday morning, BTC rallied 15% after the last rate hike in June 22 and we’re now seeing the exact same price action playing out in July 22.
If this fractal was to continue we could be trading at 23.8k by the end of the week and without some form of 3AC wrecking ball of contagion coming in to absolutely destroy the market this time round, we can have a clearer runway to retesting the 28 - 32k range that was established before prices collapsed, providing BTC a rally of 20% - 40% if this retest occurs.
This falls in nicely with bear market rallies previous ranges and would be a dangerous cocktail for late bulls to FOMO into but the shrewd investor would be accumulating at current levels.
We have taken into consideration the best possible outcome of events that could lead to a strong lift in prices, but traders and investors would be wise to proceed with caution as the wider macro picture is still quite ugly and bulls can easily lose these precarious levels with one outsized rate hike hosing down enthusiasm.
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