Investors are very much holding on to their breath today after a few tense days of selling off that shaved off decent gains from the U.S. stock indices. Their hope is that the two-day event from the Federal Reserve will revive some risk-taking sentiment among traders, as there has been a lot of noise in relation to this particular event. As for Bitcoin, many traders believe that the plunge of 10% after scoring an all-time high is a massive buy opportunity.
Background
The U.S. stock indices have scored decent gains YTD. For instance, the S&P 500 is up more than 7%, the Nasdaq-100 has scored gains of over 5%, and the Dow Jones Industrial Average has soared 1.31%. The performance of the indices was much more promising last month, as traders were optimistic that the Fed would begin the process of cutting interest rates sooner rather than later. But then, they had some reality checks later in the month, when the Fed Chairman Jerome Powell mentioned that market players are getting ahead of themselves in terms of anticipating a rate cut in March. For smart money, an interest rate cut wasn’t going to happen anytime before Q2, and they still continue to believe that the Fed will announce their first interest rate cut not during March but in the following meeting.
Powell’s testimony, which is going to take place today, is of significant importance.
Powell’s Testimony
When Powell delivers his testimony on Capital Hill today, investors are going to listen carefully to every word as they seek clues in terms of the Fed's monetary policy path for this year. The Fed has not yet won the war on inflation, as recent data has shown that the U.S. CPI is still running much hotter than the Fed’s target; the recent CPI y/y reading came in at 3.1% while the Fed's target is 2%. The fresh read of U.S. inflation will be released next week, which will be the most important economic data for the markets.
The testimony that the Chairman will deliver to the House today and to the Senate tomorrow is expected to have sharper language, but it is unlikely that there will be anything new that the Chairman will deliver in these two days, as the task is not to rock the boat.
Balance
In my opinion, what traders need to do is read between the lines, which will shape the future trajectory of interest rates or monetary policy. Basically, it is what his views are with respect to inflation and his expression of inflation progress to the House and the Senate. If those views indicate that the Fed members seem to be satisfied with the current levels while agreeing that the risk of inflation still lurks, it would mean that traders should not expect excessively accommodating monetary policy.
The balance between his expression of views with respect to inflation and the risks that still lurk are the two important ingredients. If the expressions amplify the satisfaction of the inflation part more, market players are going to be more likely to back the risk-on rally mode, which would mean that the current sell-off for the U.S. stock indices that has happened in recent days would look like an opportunity to bag a bargain. However, if the lurking risk part comes more into the spotlight, then traders are likely to feel that they need to run for safe haven assets, which means that assets like gold could potentially see more upside.
Bitcoin and Powell
Bitcoin, the crypto king, has once again proven to all naysayers that this asset class is a different kind of beast and is still in the early stages of being adopted by big money. The approval of U.S. ETFs was expected to push the to its all-time high, which happened yesterday, although the price dropped sharply after that. But the recovery of those losses took no time as the price quickly moved back above the important level of 59K, which is considered an important support level among crypto traders.
Bitcoin Trading chart by AvaTrade
Several traders believe that the rally that we are experiencing in the has been very much based on two factors: the approval of the U.S. ETF and the upcoming bitcoin halving. But remember, the primary purpose behind the creation of bitcoin was that it was not like a fiat currency, which has an unlimited supply. It is in this essence to mention the strong correlation that the has with the Fed’s monetary policy: a hawkish policy is generally bearish for the price, and a dovish or loose monetary policy is bullish for the . And the fact that the Fed hasn’t even started the process of cutting interest rates, which would weaken demand for the dollar and boost the , is a highly important factor. So in these two days’ testimony, the price of bitcoin would also be influenced by the chairman’s sharper view on monetary policy.
To conclude, traders and investors should watch the balance between satisfaction with inflation and lurking risk when the chairman delivers his testimony, as that is where the answer will be for a highly accommodative or somewhat accommodative policy that would influence the risk-on rally and the .
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Naeem Aslam
I am a former Hedge Fund Trader with over 15 years of experience in investment banking. During my early career, I was awarded a national award (Young Irish Broker) in 2010. Over the years, I have worked with Bank of America in equity trading and with Bank of New York in hedge fund trading. I specialize in Blockchain technologies (cryptocurrencies and digital assets) and Sustainable Investments. In my career thus far, I have also extensively covered Equities, Commodities and Forex.
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