Bitcoin Drops 3% Ahead of Fed Meeting, Despite Bullish Chart Pattern

Bitcoin is nursing losses ahead of a crucial Federal Reserve policy meeting that could reveal the U.S. central bank's plans in the wake of rising inflation expectations.

The top cryptocurrency, which is seen by many investors as a hedge against rising prices, was trading near $55,000 at press time, for a 3.3% drop on the day, based on CoinDesk 20 data. The decline upended any follow-through to Tuesday's impressive bounce from sub-$53,500 to nearly $57,000.

"We expect the Fed to keep the borrowing costs at record lows and maintain quantitative easing," said Joel Kruger, currency strategist at LMAX Digital. "The key focus will be on interest rate projections and whether or not an improved pandemic recovery outlook will translate to an earlier hike."

With inflation expectations at a 13-year high and the economy showing signs of life, markets are pricing an early unwinding of stimulus in the form of interest rate hikes.

As per Reuters, eurodollar futures, which track short-term U.S. interest rate expectations, are now foreseeing a first rate hike by March 2023 versus late 2023 a few weeks ago. The U.S. 10-year bond yield recently rose to over 12-month highs above 1.6%.

"If the Fed pushes back against market expectations and signals no rate hike until 2024, we think such an outcome would be supportive of bitcoin," Kruger said.

However, the cryptocurrency may face selling pressure if the central bank signals an early scaling back of stimulus, Kruger added. Investors typically buy inflation hedges when expecting rate cuts and vice versa.

Two-thirds of economists recently surveyed by Bloomberg expect policymakers to keep rates near zero through 2023. Besides, the market pricing of rate hikes has gone wrong in the past. While markets expected a rate increase in 12 to 18 months of the 2008 crash, the Fed delivered the first rate hike only in 2015, according to Reuters.

Aside from interest rate projections, the focus would be on Fed Chair Jerome Powell's take on the recent rise in bond yields and the central bank's decision on the supplementary leverage ratio (SLR), a capital-adequacy measure for banks. A looser SLR requirement theoretically allows banks to expand their balance sheets faster, which creates incremental risk but frees financing for loans to governments, businesses and households.

"The market wants the SLR extended and reassurances regarding yields. If the SLR doesn't get extended and Powell plays rising yields down, turmoil in rates would ensue, pushing other markets down," trader Alex Kruger tweeted.

Bitcoin fell by 20% in the last week of February, after the U.S. bond market jitters came to the forefront with the sharp rise in the 10-year bond yield.

As per technical charts, Tuesday's low of $53,221 is now the level to defend for bitcoin bulls.

Bitcoin formed a "hammer candle" on Tuesday, signaling an end of the pullback from the record high above $61,000 and scope for another leg higher. It's called a hammer candle because of its shape on the price chart (see above), and the pattern looks bullish.

Also read: How the Federal Reserve Might Try to Calm Inflation Fears This Week

However, the bullish setup would be invalidated if Tuesday's low is breached. That would pave the way for a drop toward $47,000 – a strong level of support revealed by the blockchain analytics firm Glassnode via a tweet earlier this month.