The current European energy crisis could force the Federal Reserve to pivot on its monetary tightening regime. However, with inflation showing no signs of abating, the cryptocurrency market may still struggle to recover significantly.
Has the market hit bottom?
From the smallest retail investors to the biggest hedge fund managers, this is the big question on everyone’s mind right now. The flurry of macro signals and technical indicators makes it difficult to understand what exactly is going on in the economy in general, let alone in the faster moving crypto market.
Several major technical indicators have been giving out buy signals over the past few weeks, reinforcing the idea that the cryptocurrency market may have bottomed out. How the crypto market reacts to macroeconomic news is worth considering. A big shift came after June consumer price index data hit a new high. Many market participants expected the crypto to start a fresh decline after this news. However, the opposite happened. Since the release of the CPI, the crypto has been trading higher, frustrating any late short selling attempts. Likewise, Wednesday’s 75 basis point rate hike and yesterday’s negative GDP growth paradoxically pushed the crypto higher, indicating that the market may now have “integrated” the current downward economic trend.
Yet, even if market participants have ceased to care about the general macroeconomic situation, this does not mean that there are not more pain coming. The fact is that inflation is still very high and the Fed is determined to bring it down to an acceptable level. Although Fed Chairman Jerome Powell said after Wednesday’s hike that he was “become appropriate to slow the pace of increases“he also left the door open for a rise”even more important” if necessary. The ongoing increases, coupled with a short sale of Treasuries and Fed mortgage-backed securities, will tighten the flow of money and almost certainly put a damper on risky assets like crypto.
The other big macroeconomic problem is the cost of energy, especially in Europe. The war in Ukraine and the ensuing boycott of Russian energy have exacerbated already alarming global inflation rates. Winter is coming, and there is a real possibility that many European countries will not have the necessary energy, and certainly not at a price that the average citizen is willing to pay. If the embargo on Russian oil and gas continues, Europe will have to rely on the United States for its energy supply in the months to come.
In recent months, the euro has weakened considerably against the dollar, helped by rate hikes and monetary tightening by the Fed. At the same time, it seems likely that European nations will have to buy American energy to run their economies, which puts the United States in a difficult situation.
The United States has two options: take steps to strengthen the euro against the dollar by injecting liquidity into the European economy or let European countries default due to rising energy costs. Keep in mind that many European countries and the European Central Bank hold foreign exchange reserves of US debt, which means that if they default, the US economy will also suffer.
Therefore, the Fed may have to end its monetary tightening to avoid a catastrophe in Europe. Currently, there is a window by winter when the US can continue to raise rates. However, Europe will soon reach a breaking point, and the Fed will be forced to ease some of the pressure by halting or reversing its current monetary policy, which will weaken the dollar.
Can the market go down before the Fed is forced to pivot? It will be difficult for the crypto to hit new lows anytime soon, given the huge amount of deleveraging that caused bitcoin to fall below $18,000. But we could certainly revisit these levels if the macroeconomic situation worsens.