Bitcoin fell to a three-week low Wednesday as U.S. Federal Reserve Chairman Jerome Powell’s hawkish testimony to Congress spurred traders to price in a higher “terminal rate.”
The leading cryptocurrency by market value fell to $21,871 during Asian trading hours, a three-week low, CoinDesk data show. Ether, the second-largest cryptocurrency, nearly tested Tuesday’s low of $1,535.
Powell on Tuesday said the central bank is likely to raise rates more than previously expected, warning that the process of pushing inflation down to the 2% target has a “long way to go.” Since last year, the Fed has raised rates by 450 basis points (bps), roiling risk assets, including cryptocurrencies.
In response to Powell’s hawkish comments, traders of the Fed funds futures lifted their forecasts for the peak or terminal rate to 5.65% from around 5.47% early this week and 4.9% a month ago. In other words, traders now expect continued tightening over the coming months, with the central bank raising rates by at least 100 basis points before calling it a day.
A closer look at the Fed funds futures reveals that traders have been pricing a “higher for longer interest rates” approach by the Fed. The Fed funds futures are derivative contracts widely used by traders to express their view of where the official interest rate will be at the time of the expiration of the contract.
As seen in the feature image, currently, October futures represent the terminal rate, implying a peak borrowing cost of 5.65%. A month ago, June futures represented the peak rate of 4.9%.
“You can see the peak in the curve is in the October contract now. Last week it was the September contract. It’s a reflection of the higher for longer trend,” Geo Chen, macro trader and author of the popular Substack-based newsletter, Fidenza Macro, told CoinDesk.
If that’s not enough, the market now sees a 70% probability of the Fed raising rates by 50 basis points later this month, a reacceleration of tightening after a brief step down 25 bps in February. The yield on the two-year Treasury note, which is sensitive to interest rate expectations, has crossed above 5% for the first time since 2007 and could rise further toward 5.655, considering the terminal rate pricing.
Rising rates/yields dent the appeal of risk assets and could make it difficult for bitcoin to sustain the current valuations, as QCP Capital noted. The Singapore-based trading firm said last month that bitcoin is yet to see the last leg of the bear market that could see prices revisit, if not break below the November low of $15,480
Chen, however, doesn’t see rising yields leading to a big sell-off in risk assets.
“I don’t see equities and crypto as being very vulnerable to a selloff anymore as there has been so much derisking and deleveraging already,” Geo Chen, macro trader and author of the popular Substack-based newsletter, Fidenza Macro, told CoinDesk. “My long-term bias is that risk assets will trend higher once we return back to a disinflation regime. However, this could take a few months.”
