‘Nuclear’ Bitcoin Warning As Fed Rate Raise Approaches – Dollar Index Reaches 20-Year High

Bitcoin (BTC) experienced a weak recovery on September 21, and the US dollar jumped to a new yearly high as investors await the Federal Open Market Committee’s interest rate decision on September 21.

BTC Price Holds $19K Ahead of Fed Decision

BTC price managed to hold onto $19,000 with a modest daily gain of 1.33%. Meanwhile, the US Dollar Index (DXY), which measures the dollar’s strength against a group of major foreign currencies, rose to 110.86, its highest level in 20 years.

BTC/USD vs DXY daily price chart. Source: TradingView

FOMC rate hike scenarios

The Fed is preparing to discuss the extent to which it can raise benchmark lending rates to curb record inflation. Interestingly, the market expects the US central bank to raise interest rates by 75 or 100 basis points.

The repercussions of higher interest rates will likely reduce the appetite for riskier assets such as stocks and cryptocurrencies. On the contrary, the US dollar will act as a safe haven for investors fleeing risky assets.

“There appears to be no reason for the Fed to temper the hawks who appeared at the recent Jackson Hole symposium, and [0.75 percentage point] Analysts at ING told the Financial Times that a “strong rally” should keep the dollar near this year’s highs.

PostyXBT, independent market analyst, argues that a 100 basis point rate could “take” Bitcoin below the current technical support of $18,800. It also indicates that BTC has a good chance of recovering if the rate hike turns out to be less than expected, or 50 basis points.

This speculation echoes public expectations for a rate hike. John Kickletter, chief strategist at DailyFX, notes that a 50 basis point rate hike would be bullish for the US stock market index.

However, a 100 basis point rate hike would be very bearish for the S&P 500. This could also be a problem for Bitcoin, which has had a consistently positive correlation with stocks since December 2021.

FOMC policy decision scenarios for DXY and SPX. Source: John Kicklighter / DailyFX

Opinion polls expect a rate hike of 75 basis points

The US economy has suffered two consecutive quarters of negative growth. Moreover, the manufacturing PMI indicated the slowest growth in factory activity since July 2020. Meanwhile, US 2-year Treasury yields outpaced 10-year US Treasury yields, plotting the yield curve.

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These metrics raise the alarm of an impending recession. But offsetting that data is unemployment data at a record low and housing start rates still above the $1.35 million risk zone, according to data provided by Charles Edwards, founder of Capriole Investments.

Total start-up of new privately owned housing units. Source: Fred

Recession warnings usually cause the Fed to pivot. In other words, to cut back or pause your hike rates. But Edwards notes that the central bank will not pivot because the US economy is technically not in a recession.

“Until the main fears of a recession emerge, until it hurts where it matters — employment — there is no reason to expect an urgent policy change here,” he wrote, adding:

“So it’s business as usual until we have evidence that inflation is under control.”

Most economists, or 44 of 72 polled by Reuters, also expected the Fed to raise interest rates by 75 basis points at their September meeting. Therefore, Bitcoin could avoid a deeper correction if it maintains its correlation with the S&P 500, based on the outlook of Kicklighter.

Bitcoin to $14,000 Next?

From a technical perspective, Bitcoin could drop to $14,000 in 2022 if a drop from the current support level around $18,800 leads to a “head and shoulders” crash.

BTC/USD daily price chart featuring a head and shoulder breakdown setup. Source: TradingView

Conversely, a rebound from the $18,800 support level could make BTC price $22,500 as a temporary bullish target, or a 16.5% rally from the September 21 price.

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