Bitcoin Volatility Remains Muted Ahead of Fed Rate Decision, Traders Expect Low Impact

Bitcoin’s (BTC) price volatility continues to remain subdued, mirroring the tranquility seen in U.S. stock and bond markets. Crypto traders anticipate that this low-volatility trend will persist even after the Federal Reserve’s (Fed) rate decision scheduled for Wednesday.

The Federal Reserve is set to announce its rate decision on Wednesday at 14:00 ET, along with a statement, the Summary of Economic Projections, and a new “dot plot” of interest-rate estimates. Fed Chair Jerome Powell will follow with a press conference half an hour later.

The central bank has been actively combating inflation by raising rates, hiking them by 525 basis points since March 2022. This initial phase of the tightening cycle injected volatility into both crypto and traditional markets, which had grown accustomed to abundant liquidity.

For Wednesday, market expectations are that the central bank will maintain the benchmark borrowing cost within the 5.25% to 5.5% range and retain its data-dependent stance.

According to Greg Magadini, Director of Derivatives at Amberdata, rates traders are nearly certain, with a near 100% probability, that the Fed will keep rates unchanged on Wednesday.

“The Fed has been very adamant about remaining ‘data dependent’ and signaling the ability to ‘hold rates higher for longer’. To me, this means the Fed can navigate this week’s FOMC meeting by keeping rates unchanged, but signaling rates will remain elevated while they monitor economic releases,” noted Greg Magadini in a client note on Monday. “In my opinion, this would make the FOMC [Fed] meeting a low volatility event.”

The Fed has consistently emphasized that its future rate decisions hinge on the evolution of inflation and employment, refraining from signaling a definite end to the rate-hike cycle initiated in March of the previous year.

It is expected that the Fed will reiterate this message on Wednesday, given the prospect of inflation rebounding.

The markets, accustomed to rapid rate cuts over the past four decades, could swiftly incorporate expectations of renewed liquidity easing if the Fed hints at concluding the tightening cycle. This would pose challenges for the central bank.

In essence, the likelihood of the central bank delivering a hawkish or dovish surprise is low, favoring the prevailing low volatility in bitcoin and traditional markets.

“We doubt it [volatility] will come from this Fed itself,” noted Singapore-based crypto trading firm QCP Capital. “Into the final three meetings of the year, we expect the appetite within the FOMC to hike again is extremely low. At the same time, we do not see how Powell can assuredly call an end to this hiking cycle, given the surging pump prices and rebounding inflation.”

“With [Fed Chairman Jerome] Powell likely to attempt his best volatility-killing fuzzy guidance yet again, it is unlikely that current market pricing of half a hike this year followed by three cuts next year will shift much,” QCP added.

Looking at Bitcoin options set to expire this Friday, which encompass the Fed and Bank of Japan (BOJ) meetings, these rate decisions are seen as potentially non-events. Options are derivative contracts used to assess possible post-event volatility in the underlying asset.

“Based on Bitcoin options market pricing, traders expect that BTC will only move by 2.8% this Friday, a sign that nobody expects any market-moving comments from Chairman Powell,” observed Markus Thielen, Head of Research and Strategy at crypto services provider Matrixport. “In 2023, Bitcoin has only rallied by +1% shortly after the FOMC meetings and increased by +3% one week later.

Show More
Back to top button