Gate Research Institute: A wave of interest rate cuts is coming, will the market bottom out and reverse?

24-07-23 21:19

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Original source: Gate Research Institute

Fed Chairman Powell recently expressed the view that inflation data is conducive to interest rate cuts three times. The market generally expects that the Fed may implement two interest rate cuts this year. This series of interest rate cuts is expected to significantly increase the liquidity of funds in the market, which will have a significant positive impact on the cryptocurrency market, indicating that more funds may flow into this field.

Summary:

· After the release of the June CPI data, the market generally expected that the Fed may take interest rate cuts in September, and Fed officials also publicly stated that the time for interest rate cuts is approaching.

· In the short term, the interest rate cuts by global central banks represented by the Federal Reserve have undoubtedly injected a shot in the arm for the cryptocurrency market. As market liquidity increases significantly, the expectation of interest rate cuts will directly trigger market optimism.

· The prelude to interest rate cuts by global central banks has brought new opportunities and challenges to the crypto market, which requires investors to make comprehensive analysis and participate rationally.

Introduction

Recently, when inflation did not reach the expected control target, the Bank of Canada and the European Central Bank cut interest rates ahead of the traditional path to cope with the global economic slowdown and economic pressures in various countries. Although the Federal Reserve has not officially cut interest rates, given the significant slowdown in inflation data in the past three months, Federal Reserve officials have hinted that the time is ripe for interest rate cuts. The market expects the Federal Reserve to start cutting interest rates in September, and the crypto market has begun to rebound due to expectations of liquidity easing. This article will discuss this in detail.

Europe cuts interest rates first, and the Federal Reserve is about to follow up

Recently, the Bank of Canada and the European Central Bank, as followers of this round of interest rate hikes, took the lead in choosing to cut interest rates when inflation was higher than the target to cope with the slowdown in global economic growth and the multiple economic pressures faced by various countries.

Although the European Central Bank has taken the first step of cutting interest rates, the Federal Reserve has not yet cut interest rates. However, as the June CPI data broke out, the month-on-month growth rate turned negative for the first time in four years, and the core year-on-year growth rate hit a three-year low, Federal Reserve officials publicly stated that the time for cutting interest rates is approaching, and the market generally expects that the Federal Reserve may start to cut interest rates in September.

In fact, Federal Reserve Chairman Powell has recently made many speeches on inflation and economic conditions, revealing the Fed's subtle attitude towards policy adjustments. In his statement this week, he further stated that the slowdown in inflation and economic activities is basically consistent with the Fed's expectations, especially the second quarter inflation data has strengthened the market's confidence in the decline in inflation to a certain extent, especially the price increase rate is steadily falling back to the 2% target set by the Federal Reserve, which indicates that the window for interest rate cuts may be about to open.

He also mentioned that the labor market is now in a more balanced state, and any unexpected weakness in the future will also be a factor in adjusting interest rates.

The market reacted strongly to this dovish tone, and the CME's FedWatch tool showed that the market generally expected the Fed to announce a rate cut at the September policy meeting, and the expectation was almost 100% certain.

It is worth mentioning that this week, the market will pay close attention to key economic data such as US retail sales, industrial output and weekly unemployment claims in June. These data are expected to provide more clues to assess the strength of the US economy and thus affect the market's expectations for the timing of the Fed's rate cut. Gate Research will continue to follow up and analyze it for everyone.

Overall, with the easing of inflationary pressures and the adjustment of economic growth expectations, the Fed's rate cut has become a general consensus in the market, which is undoubtedly a long-awaited positive signal for the cryptocurrency market.

Will the interest rate cut directly benefit the crypto market? Yes or No

Although the market is full of interpretations of the positive impact of interest rate cuts on the crypto market, we have also seen some cautious analysis.

Generally speaking, interest rate cuts are seen as a catalyst for increased market liquidity, because lower borrowing costs will stimulate investors' enthusiasm for investment. This increased liquidity can often penetrate into emerging markets such as cryptocurrencies, thereby pushing up their prices.

In addition, the increase in economic uncertainty in an interest rate cut environment has prompted investors to seek safe-haven assets. Cryptocurrencies such as Bitcoin have gradually become new safe-haven options due to their unique decentralization, fixed supply, and easy storage characteristics, which will naturally further enhance their market attractiveness and prices.

Although the market is full of expectations for interest rate cuts, many institutions generally believe that it is necessary to remain cautious in the complex and changing market environment. For example, Morgan Stanley strategists predict that the US stock market may fall back by 10%, while Goldman Sachs expects a large amount of funds to flow out of the US stock market in August, waiting for the election results to become clear.

This cautious attitude is mainly based on concerns about a possible recession in the US economy. During the financial crises in 2001 and 2008, although the Federal Reserve implemented interest rate cuts in the early stages, the market briefly reached a high point and then encountered a sharp downward trend. Even the Federal Reserve's rapid and substantial reduction in interest rates failed to effectively curb the further spread of the crisis. The roots of these two crises can be traced back to the collapse of the Internet bubble and the real estate bubble, which had a profound recessionary impact on the economy.

As for whether the current interest rate cut policy will repeat the same mistakes, triggering outbreaks such as the artificial intelligence bubble or the US debt crisis, and then dragging down the crypto market, it is still worth being vigilant.

Under the disturbance of multiple factors, the crypto market may rise steadily

In fact, in the short term, the interest rate cuts by global central banks represented by the Federal Reserve have undoubtedly injected a shot in the arm for the cryptocurrency market. There is no doubt that with the significant increase in market liquidity, the expectation of interest rate cuts will directly trigger the market's optimism, which may prompt the cryptocurrency market to usher in a wave of rising prices in the short term, bringing investors opportunities for quick profits.

However, in the long run, the trend of the cryptocurrency market will be affected by more complex and changeable factors, and price fluctuations are rarely driven by a single factor, which requires comprehensive analysis.

First, the strength of economic recovery is one of the important factors that determine market trends. If the interest rate cut policy can effectively boost the economy and improve the overall economic environment, the cryptocurrency market is expected to benefit from it and enjoy the dividends brought by economic growth. On the contrary, if the economic recovery is less than expected and market confidence is frustrated, cryptocurrencies will naturally be difficult to remain unaffected. For example, during the 2020 COVID-19 pandemic, Bitcoin was affected by the stock market and commodities and also experienced a 312 crash.

Secondly, inflationary pressure is another factor that cannot be ignored. The central bank's interest rate cut is intended to stimulate the economy, but it may also trigger the risk of rising inflation. Once inflation is high, the central bank may adjust its policy direction and consider raising interest rates to curb inflation, which will directly put pressure on the cryptocurrency market. Therefore, investors need to pay close attention to global inflation data and the policy trends of the central bank in order to adjust their investment strategies in a timely manner.

Furthermore, the US election and changes in the global regulatory environment have a far-reaching impact on the cryptocurrency market. With the rapid development of the market, global regulators are paying more attention to it. While the spot ETFs of Bitcoin and Ethereum are being recognized by regulators, they have also brought more regulatory attention pressure, so the future direction of regulatory policies will still be directly related to the stability and development prospects of the market.

Despite many uncertainties, the opportunities brought by interest rate cuts to the cryptocurrency market cannot be ignored. We believe that the monetary easing policies of central banks such as the Federal Reserve are expected to provide more liquidity support for crypto assets such as Bitcoin and promote the continued development of the market. At the same time, with the gradual improvement of the regulatory framework and the continuous maturity of the market, crypto assets are expected to play a greater financial value in the future and create more wealth opportunities for investors.

In short, the prelude to interest rate cuts by global central banks has undoubtedly brought new opportunities and challenges to the crypto market, which includes factors such as increased liquidity and increased risk aversion, as well as the lessons of historical financial crises and other complex factors. We believe that although there is always a long-short game in market prices, under the background of a more constructive regulatory framework and the expansion of crypto reality adoption, the innovation and application of digital assets will serve more community users and release more innovative value.