The fluctuations in the cryptocurrency markets are closely linked to macro developments, just as the saying goes, “what you see is what you get.” While we seem to have reached the end of the period when the Fed rapidly increased interest rates, things can once again become chaotic. After a recent announcement, the price of oil started to rise again. But what is the reason behind this?
Will Cryptocurrencies Fall?
What does the price of oil have to do with cryptocurrencies? There is no direct connection, but a direct link can be established between the Fed and the performance of cryptocurrencies. How do we know this? Of course, from the price graph that fluctuates during the Fed interest rate decisions. We can explain the situation as follows:
- The Fed has stopped increasing interest rates due to the ongoing decrease in inflation.
- As a result of the Fed’s decision to keep its front-loaded interest rates unchanged and observe the outcome, the markets have begun to price in a 100bp interest rate cut for the next year.
- If the Fed lowers interest rates, it means that cryptocurrency, which enters the risk markets due to the cheapening of money, will attract more liquidity.
- If the decrease in inflation reverses, the assumption that the Fed will tighten further will find support, and the risk markets will go in the opposite direction, south.
- The increase in oil prices negatively affected the September inflation data last month, which pushed the Fed towards hawkish statements. Naturally, cryptocurrencies were also negatively affected by this.
- Subsequently, with the drop in oil prices, optimism in the markets increased, and we saw inflation erosion fueled by the decrease in energy costs in the October inflation data released this week. We were happy.
Exactly at this point, our enthusiasm may be dampened. OPEC+ will evaluate whether to increase or decrease production cuts at the next meeting on November 26. The decrease in oil prices supported the downward movement in US inflation. An increase in the cuts could push the price up. The increase in energy costs due to the contraction in supply further intensifies the Fed pressure on cryptocurrencies. The graph below shows us that expectations have already been priced in and the price of oil has risen.
