Risky assets, including cryptocurrencies, traded lower early Tuesday, a sign of renewed nervousness over the impending Federal Reserve (Fed) liquidity tightening.
Data from Forbes shows bitcoin, the leading cryptocurrency by market value, at $562 billion, fell more than 5% to $29,300, reversing Monday’s relief rally, which saw prices rise from $29,800 to $31,700. The rebound was sparked in part by China’s decision to roll back economy-damaging covid lockdown restrictions.
Ether, the native blockchain token of Ethereum, followed bitcoin lower, dropping 5% to $1,725. The broader crypto market has withered, with Terra Luna Classic’s new LUNC token, Neo blockchain open-source cryptocurrency, and Dfinity Foundation’s Internet Computer Token (ICP) taking a hit. more successful than bitcoin and ether. There were no winners at press time.
Asian and European stock markets fell early in the day and S&P 500 futures fell more than 0.4%. The yen fell to a new 20-year low of 133 per dollar after Bank of Japan (BOJ) Governor Haruhiko Kuroda ruled out monetary tightening, underscoring growing divergence from the Fed’s aggressive tightening plans . The yen has been the poster boy for the Fed’s trade, given the BOJ’s commitment to continue printing money amid rising inflation around the world. This year, the yen has fallen 15%, a substantial drop for a currency from a developed country.
Perhaps the main source of risk aversion was the return of the Fed’s so-called hawkish trading, where investors buy dollars and sell interest-rate-sensitive assets like stocks, emerging technology assets such as cryptocurrencies and relatively low-yielding currencies like the Japanese yen. , on expectations that the Fed will suck liquidity out of the system.
These fears have dominated market sentiment since November and came back into focus with the US Nonfarm Payrolls report released by the Labor Department, highlighting continued labor market strength and weak chances that the economy will plunge into a recession anytime soon.
The data essentially validated the Fed’s long-held belief that it would be able to turn off the liquidity tap without causing a hard landing or plunging the economy into a recession – a period characterized by back-to-back quarterly contractions in the growth rate – and weakened the case for the Fed to suspend tightening in September. This may have led investors to sell risky assets again.
Stocks and cryptocurrencies breathed a sigh of relief in the second half of May after Raphael Bostic, the chairman of the Atlanta branch of the Fed, opened the door to the possibility of the Central Bank suspending increases. rates in September. Hopes of a pause were boosted after data released on May 28 showed the Personal Consumption Expenditure (PCE) price index, the Fed’s preferred measure of inflation, rose by 0, 2% in April, the smallest gain since November 2020.
Further downside pressure for risky assets likely stems from expectations of an aggressive unwind of stimulus from the European Central Bank (ECB), which has remained dovish so far despite rising inflation in the common currency area. .
According to Reuters, Bank of America expects the ECB to raise interest rates by 150 basis points this year, including moves of 50 basis points in July and September. The central bank’s benchmark interest rate is currently at -0.5%.
Finally, caution ahead of a much-anticipated US Senate proposal to place the cryptocurrency industry under federal scrutiny may have caused investors to take some risks off the table. The sponsors, Senators Cynthia M. Lummis and Kirsten Gillibrand, are expected to introduce their Responsible Financial Innovation Act bill later today.
From a technical analysis perspective, the crypto market valuation is flirting with crucial support which, if breached, could pave the way for deeper losses.
The daily chart shows that the crypto market capitalization has formed a symmetrical triangle over the past three weeks, marking a consolidation between converging trend lines. This structure results from the bulls and bears not wanting to lead the price action. A big move is usually seen in the direction in which the price squeeze is finally resolved, meaning a breakout leads to higher prices while a range breakout draws more sellers into the market.
At press time, the total market capitalization was trading around the lower end of the triangle. A UTC close would confirm the breakdown, giving way to a decline towards the May low of $1.082 trillion.
On the other hand, a break would open the doors to resistance at $1.489 trillion, marked by the January 24th low.