First Mover Americas: Hawkish Fed Trade May Not Be Over Yet

Good morning, and welcome to First Mover. Here’s what’s happening this morning:

• Market Moves: Bitcoin holds trendline support ahead of the Fed. The central bank is expected to accelerate the pace of monetary tightening. One observer said the hawkish trade isn't over yet.

And check out the CoinDesk TV show “First Mover,” hosted by Christine Lee, Emily Parker and Lawrence Lewitinn at 9:00 a.m. U.S. Eastern time.

• Hester Peirce, commissioner, Securities and Exchange Commission
• Ulrik K. Lykke, executive director, portfolio management, ARK36
• Damanick Dantes, markets reporter, CoinDesk

Market Moves

It's Fed day again.

The central bank is expected to accelerate the pace of monetary tightening with a 50 basis points (0.5 percentage point) rate hike and announce quantitative tightening – a phased reduction in the size of the balance sheet that has doubled to nearly $9 trillion in two years. The 50 basis point hike would lift the Fed funds target rate range to 0.75% to 1%. A basis point equals 0.01%.

The futures market is pricing in a fed funds rate of 2.82% by the end of this year, implying a 50 basis point rate hike in May and similar outsize moves in June, July and September.

Therefore, the consensus is that peak Fed hawkishness is baked in. The central bank couldn't get more hawkish, and risk assets, including bitcoin, could rally following the event.

Since December, it's been the dominant narrative, yet the Fed has surprised markets each time, killing recovery rallies. That's evident from lower highs on bitcoin's daily chart. The cryptocurrency picked up bullish momentum after the Fed kicked off the tightening cycle with a 25 basis point rate hike on March 16 and rose from $38,850 to $48,000 in the following two weeks, partly aided by the Luna Foundation Guard's (LFG) aggressive purchases. The gains, however, were erased in April, with Fed chair Jerome Powell putting a 50 basis point hike on the table.

It may not be different this time, according to Jon Turek, author of the Cheap Convexity blog.

"To me, the hawkish trade isn't over," Turek wrote in the Fed preview published Wednesday, adding that the central bank is in the early stage of the tightening cycle and won't stop being aggressive until they are at a neutral policy setting. The Fed currently sees the so-called terminal or neutral rate of 2.5%.

And while the Fed's preferred measure of inflation, the core personal consumption expenditure price index, recently showed the worst of price rises might be behind us, the labor market remains strong. So, the central bank is unlikely to soften its hawkish stance anytime soon.

"I think an under-discussed reason for the elevated hikes pace, are the new pace camp, is the labor market," Turek noted. "The ECI (employment cost reading) reading on Friday was a reminder to the Fed that while the peak of inflation is in, it still may be at a troubling trend rate that could be exacerbated by a very tight labor market."

Lastly, the very fact that the Fed is going for 50 basis point moves, something that it hasn't done since 2000, perhaps indicates that the central bank is trying to play catchup, after falling behind the curve on inflation in the past 12 months. The bar for the Fed to turn dovish is very high and Powell, during his press conference, is unlikely to rule out even bigger rate hikes in coming months. According to Market Watch, the Fed funds futures see a 91% likelihood of a 75 basis point hike in June, up from 19% a month ago.

All things considered, odds appear stacked against a notable relief rally in bitcoin, more so, as the euphoria from LFG's bitcoin purchases has faded and funds saw record outflows in April.

From a technical analysis standpoint, the focus is on the trend line connecting Jan. 24 and Feb. 24 lows. A break lower would mean a continuation of the sell-off from November highs around $69,000 and expose the bigger ascending trend line, currently located at $29,400.

On the higher side, the March 28 high of $48,250 is the level to beat for the bulls. The cryptocurrency could begin the march toward that level if the Fed unexpectedly focuses on the negative impact of rates on the economy and softens expectations for a 75 basis point hike in June.

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Today’s newsletter was edited by Omkar Godbole and produced by Parikshit Mishra and Stephen Alpher.