Whether it is a cryptocurrency trader or a traditional financial market participant, the upcoming Fed interest rate meeting cannot be ignored. The Fed’s interest rate decision will become a key driver of the market for all asset classes, such as stocks, commodities, and even cryptocurrencies. This meeting at the end of July is very important for all parties, as we may see the first rate cut in 2019 .
Market expects interest rate cuts
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As the global economic situation deteriorates, it is doubtful whether the US economy will continue to expand. The global trade situation remains tense. The market expects the Federal Open Market Committee ( FOMC ) to cut the benchmark interest rate by 25 basis points. James Brad, Governor of the Federal Reserve Bank of St. Louis, told Bloomberg, "I hope to lower the benchmark interest rate by 25 basis points at the upcoming meeting." And New York Fed President John Williams went further and called for more aggressive policy initiatives. According to the position of the Chicago Mercantile Exchange ( CME ) FedWatch 's US interest rate futures market trader, there is an 80 % chance that FOMC may lower interest rates by 25 basis points at the July policy meeting.
(Source: CME Group)
Why is gold so important?
In the context of weak global economic growth, gold has once again become the focus of market attention. Precious metals were one of the worst performing asset classes of the year, but it bounced back in May 2019 and broke through $ 1,440 this month .
The latest US Commodity Futures Commission ( CFTC ) trader's weekly report shows that the net position of “non-commercial” (speculative) traders in the US gold futures market is still close to historical highs, suggesting that market sentiment is still good for gold.
Traditionally, lower interest rates have reduced the opportunity cost of holding non-revenue gold and put pressure on the dollar. If interest rates are cut as expected in July , and the market maintains expected more interest rate cuts, this may help stabilize the gold bulls' base and continue the gold price gains.
US Commodity Futures Commission Dealer Position Weekly (Source: CFTC; invest.com )
Can gold and risk appetite tell us about Bitcoin?
Gold and Bitcoin continue to show a high degree of correlation during the recent rally, and such a highly synchronized situation has not occurred since 2016 . The chart below shows that gold and bitcoin have been negatively correlated from the fourth quarter of last year to the first half of this year, but the relationship between the two began to change at the end of June.
Gold and Bitcoin (Source: www.tradingview.com )
If gold and the yen are traditional safe-haven assets, then bitcoin may be seen as a new risk aversion tool. USD/JPY has been one of the key risk sentiment barometers in the market. When global risk sentiment is high, funds will flow into the yen. When we look at the dollar, the yen and the bitcoin side by side, we find that the cryptocurrency seems to play the exact same role as the yen. Most importantly, given the slowdown in US economic growth and the increased risk of long-term economic stagnation in other regions, this will limit the possibility of the Fed raising interest rates and putting additional pressure on the dollar, while the yen and bitcoin may benefit from this.
USDJPY and Bitcoin (Source: www.tradingview.com )
The July meeting of the Federal Reserve is undoubtedly crucial for all market participants. The road to raising interest rates seems to have ended, at least in the short term. Based on unresolved trade tensions and economic uncertainty, the medium- and long-term bearish momentum of the US dollar is expected to remain strong, and safe-haven assets such as gold and yen will continue to have high demand. With reference to the correlation between gold and the US dollar and the Japanese yen, Bitcoin is also likely to benefit from this global risk-building environment.
As the relationship between the cryptocurrency sector and the traditional financial market becomes more and more tight, more traditional market participants are beginning to enter the bitcoin market, and the medium and long-term bitcoin bullish situation remains firm.
Disclaimer: This material should not be used as a basis for making investment decisions, nor should it be considered as a recommendation to participate in an investment transaction. Trading digital assets involves significant risks and may result in loss of your investment capital. You should ensure that you fully understand the risks involved and consider your level of experience, investment objectives, and seek independent financial advice when necessary.