• Crypto traders turn cautious ahead of Fed decision

• Trump’s crypto project does not spark fireworks

• ETF inflows slow substantially

• Overly dovish Fed bets pose downside risks

 

Cautiousness as Fed cut looms

Bitcoin recovered more than 15% between September 7 and 14, perhaps as more market participants were convinced that the Fed will start this easing cycle with a bold 50bps move on Wednesday.

Although there are no concrete signs about a potential recession in the US, the softening of the labor market, which Fed Chair Powell placed additional emphasis on at Jackson Hole, as well as reports that Fed officials are indeed facing a dilemma on whether to proceed with a double cut or not, inflated speculation about a strong first cut, with the probability of a 50bps reduction climbing to 70%.

The total number of basis points worth of reductions by December was also increased to 120, which means investors believe that another double cut may be on this year’s agenda.

US politics and ETF flows

Yet, the crypto king slipped on Monday, even as equities extended their gains and the US dollar lost more ground. This points to a weakening correlation between Wall Street and the crypto world, and that may be due to other variables besides the Fed.

Perhaps the fact that Kamala Harris is consistently leading the crypto-friendly Donald Trump in the polls for the US election did not allow the bulls to confidently build on their long positions, prompting some early and cautious liquidation.

On top of that, crypto traders were little enthused by the release of some details with regards to Trump’s “World Liberty Financial” crypto project. Trump wants to create a crypto banking and exchange platform that will have its own native token. About 20% of the tokens will be reserved for the founders, 17% will be rewards, and 63% will be released to the public.

According to data from CoinGlass, the total net inflow to spot bitcoin Exchange Traded Funds (ETFs) was also reduced considerably on Monay after Friday’s sharp acceleration, corroborating the notion that investors may have turned cautious ahead of Wednesday’s Fed decision.

What’s next?

Apparently, where cryptos may be headed this week will depend on the outcome of the Fed decision and the size of the Committee’s first rate reduction. With the Atlanta Fed GDPNow model suggesting that the US economy grew 2.5% in Q3, a 25bps cut may be the wiser choice for policymakers at this stage as it will give them time to evaluate incoming data without tilting much inflation risks to the upside.

But even if they cut by 50bps, the dot plot may not point to as many basis points worth of reductions as the market currently anticipates for 2024. With no imminent signs of recession, Powell may justify a bold move by characterizing it as front loading.

All this suggests that there is elevated risk of disappointment, meaning that Bitcoin could drift further south this week. A decisive dip below $56,200 may pave the way towards the $50,500 territory.

For a strong rally to occur, the Fed may need to appear more dovish than the market, a scenario that appears unlikely. The low chance of such an occurrence though means a more violent move. So, if indeed the decision has an ultra-dovish flavor, bitcoin may break the key resistance of $61,600 and perhaps skyrocket towards the $70,200 zone.