Crypto markets caught in the crossfire of the Fed's mixed signals

Yet Fed Chair Powell continues to suggest that interest rate cuts are on the horizon this year despite the strong economic backdrop.

This contradiction has sparked intense volatility and divergence across asset classes. Risk assets like equities and cryptocurrencies initially pulled back on signs of economic strength as traders questioned how the Fed could justify easing policy. 

How do the latest economic data and Fed-speak potentially change market dynamics?

Let's dive in.

TLDR

• Bitcoin displays the telltale signs of a market searching for direction, with open interest resetting from frothy levels and funding rates normalizing from excessively bullish territory.
• Ethereum appears trapped in a bearish technical pattern, while the unstoppable Solana ecosystem continues beckoning with lucrative alt opportunities.
• As the macroeconomic drama unfolds, selective positioning and discernment will be vital for navigating the crosscurrents. 

Disclaimer: This is not financial or investment advice. You are responsible for any capital-related decisions you make, and only you are accountable for the results. "One Glance" by Cryptonary sometimes uses the RR trading tool to help you quickly understand our analysis. These are not signals, and they are not financial advice.

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Fed-speak continues to impact market dynamics

Recent economic data has seen inflation slightly hotter than expected, while employment data has shown a strong labour market. But in Powell's last Press Conference following the last Fed meeting, he struck a dovish tone, suggesting that the Fed would still do 2-3 interest rate cuts this year. 

This is despite strong data and hotter-than-expected inflation data. So the market wondered: How can the Fed cut interest rates in a strong economy? It doesn't make sense to do so. 

This is perhaps why we've seen a slight pullback in all risk assets, equities and crypto last week and this week. Then, on Monday, the ISM Manufacturing data came in super strong, with the prices-paid element up considerably. This shocked the markets in that it was taken that the economy was perhaps even stronger than expected, and, therefore, the Fed wouldn't be able to cut interest rates into this. 

So, the markets actually came down more. However, yesterday (Wednesday, April 3rd), Powell spoke at Stanford University, where he again said that the Fed would cut interest rates this year. Other Fed speakers have been more hawkish (pushing back on rate cuts) than Powell, so bear this in mind. 

What does all the above mean? 

Despite data coming in strong - which should mean fewer rate cuts are needed, as why do you need to cut rates to stimulate the economy when the economy is already doing well ?—Powell has consistently said that the Fed would begin cutting interest rates this year. This is why we saw the markets react negatively on Monday and Tuesday, and they have now recovered slightly after Powell spoke yesterday. 

I (Tom) see it possible that we get one 25 basis point rate cut in July, and then potentially another rate cut in Q4 of this year. If the data that comes in changes materially, then the situation may change. However, with the situation outlined above, risk assets and crypto can continue to do well, with 1-2 rate cuts expected for this year. 

Market mechanics

Prior to prices pulling back from all-time highs, Bitcoin's Open Interest (the amount of leverage build-up) was very high, which usually indicates a frothy market that generally results in a meaningful price pullback. 

This is exactly what we've seen. At the time, the Funding Rate was also majorly positive, meaning there was a massive bias among leverage traders to be Long. Again, this is never good and usually leads to a flush-out. 

One to two weeks after the above, we've seen Open Interest come down and reset somewhat from $36.31b to $32.24b, a nice 10% or so reset. This is healthy for the market and good to see at this point. 

Bitcoin open interest

The Funding Rate has also pulled down to 0.01%, indicating more even positioning between Longs and Shorts. Again, this is great to see and exactly what this market needs at this point in time. 

Bitcoin funding rate

Charts

This week, we saw the Dollar and Bond Yields go higher on the macro outcomes we discussed in the top section of this update. This is bearish for risk assets such as Equities and Crypto. However, in the past two days, we've seen this reverse, with the DXY (Dollar) down and Yields down. 

The DXY is down more substantially than Yields, but ultimately, this has pushed the market back to a risk-on environment again, which is good for crypto. Note the Dollar's move down in the last few days. It would be good to see this continue. 

DXY (Dollar Index)

BTC 

To me (Tom), Bitcoin looks like it's in more of a larger bull flag pattern. It's good to see that price bounced from the middle 50% line of the flag, keeping price in the top half of the channel/flag, this is good/bullish. 

We may see this range-bound price action play out for a few more weeks first, before potentially breaking out of the bull flag sometime in May and aiming for that $80k BTC price. 

The longer the range-bound price action continues, the more the RSI and overheated on-chain indicators can reset, so this is all positive, in my opinion. 

A break below $57k/$58k would probably invalidate my thesis, although that would be the bottom border of the bull flag. 

Let's see.

ETH 

ETH is in an uglier bear flag pattern - which usually has a bias to break to the downside. If ETH does break to the downside, I expect the Yellow Buy Box to be decent support again, and I'd even consider adding more to my ETH bags. 

But I am much less bullish on ETH than BTC, SOL, and SOL's ecosystem, so I'd rather place and focus there instead.

SOL

Le monster. SOL is still looking good here, to be honest with you, and I'm relatively content with it. The formation is a bullish pennant that usually breaks to the upside, giving SOL mid-term targets of $230 and $280. 

It is still possible that SOL could break down, but I think that would take a big breakdown from BTC, which would essentially bring the whole market down with it. But for now, we don't expect BTC to really dip below $63k in the short term, which would be a 5% pullback for BTC, and we think SOL can still hold up relatively well under this context. 

The major opportunities we see currently aren't SOL itself, but SOL ecosystem plays such as RNDR, PYTH, SHDW and NOS.

Cryptonary's take 

The macro situation is becoming slightly more shaky. Each data point seems increasingly important as if each has the weight to potentially change the macro outlook. We will, therefore, continue assessing it daily and keeping a close eye on it. 

But, for now, the economy is still holding up well, and the Fed and Powell still seem intent on cutting interest rates. This is due to Interest Expense Control, which we get into more in the Monthly Report, which I will complete and release in the coming days. 

The picture remains good for crypto to remain range-bound (probably in the very short term) or go higher from there. We continue holding Spot and look to continue riding the markets higher over the coming months. 

But we are also becoming more selective in how we add fresh risk, i.e., new USDT. It's important not to chase major plays and to focus on ALT opportunities here that have pulled back from their highs more considerably. Plays I have added to in the past few days are SHDW and NOS.

Cryptonary, Out!