Bitcoin is showing similarities with gold and JPY, and the expected Fed rate cut may lay solid ground for BTC
Whether you are a crypto trader or a traditional financial market participant, the upcoming US Federal Reserve interest rate meeting is something that you cannot afford to ignore. The Fed’s interest rate decision will certainly be a key driver of all asset classes such as equities and commodities, even crypto. The month-end meeting is especially important because we may see our first rate-cut this year.
Rate Cut is Expected
As the global economic mood sours, the continuation of the US economic expansion is questionable, and global trade tensions remained high, markets are expected the FOMC to cut the rates by 25 basis points next week. St. Louis Fed President James Bullard told Bloomberg that, “I’d like to go 25 basis points at the upcoming meeting,”, New York Fed President John Williams went even further, calling for a more aggressive policy move. According to CME’s FedWatch, US rates futures implied traders positioned for an 80% chance that the FOMC may lower its rate by a quarter-point at its July policy meeting.
Why Gold Matters?
In the background of a weaker global economic growth, gold has been back in the spotlight. The precious metal was one of the worst-performing asset classes last year, but it managed to make a comeback in May 2019, topped $1440 level just this month.
The latest CFTC’s weekly Commitments of Traders report shows that, the net positions for “non-commercial” (speculative) traders in US gold futures markets still near an all-time high, implying market sentiment remains positive for gold.
Traditionally, lower interest rates reduce the opportunity cost of holding non-yielding gold and pressure the dollar. If the July rate cut is materialized and the expectation of more rate cuts remained intact, this could help gold bulls to gain more solid ground, extending the momentum of the bullion rally.
What Gold and Risk Appetite Can Tell Us About BTC?
Gold and BTC have continued to show high correlation during their recent rallies, we haven’t seen such a high degree of synchronization since 2016. The following chart shows that gold and BTC were mostly in an inverse correlation in Q4 last year to H1 of this year, but their relationship started to change in late June.
If gold and JPY were the traditional safe-haven assets, then BTC perhaps could be considered as a new kind of risk-aversion tool. Let’s have a look at USDJPY, it’s one of the key risk sentiment barometers in the market, capital flows into JPY when global risk sentiment is high. When we look at USDJPY and BTC together, the cryptocurrency seems to play exactly the same role as JPY. On top of that, considering the slowing of the US economic growth, and the growing risk of long-term stagnation elsewhere, that will limit the possibility of the Fed to increase interest rates, causing additional pressure to USD, JPY and BTC could benefit from that.
The Fed July meeting is certainly important for all market participants. The road to rate hike seems to come to an end, at least in the near term. The case of medium to long term bearish of USD remains strong, safe-haven assets such as gold and JPY are expected to continue on high demand due to unresolved trade tensions and economic uncertainties. Referencing the correlations with gold and USDJPY, BTC could also benefit from this global risk-building environment.
More traditional market players have put BTC under their radar, as the tie between the crypto world and traditional financial markets is getting closer every day. The medium to long term BTC bullish case remains solid.
Disclaimer: This material should not be taken as the basis for making investment decisions, nor be construed as a recommendation to engage in investment transactions. Trading digital assets involves significant risk and can result in the loss of your invested capital. You should ensure that you fully understand the risk involved and take into consideration your level of experience, investment objectives and seek independent financial advice if necessary.
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