Goldman sees rate cuts next year amid ‘strong’ tailwinds for Bitcoin

Market participants turn their attention to the Fed’s final meeting of the year on Wednesday.
The central bank is widely expected to keep the Fed funds rate unchanged. And begin cuts in 2024.

US inflation figures met estimates on Tuesday. This could be good news for crypto prices, which consolidated over the weekend and into Monday amid a deleveraging event.

Here’s why!

Macro matters

US inflation was in line with estimates in November. Headline inflation rose 3.1% year-on-year, and 0.1% month-on-month.

While prices in the US are still rising the pace of increases has slowed, which is known as disinflation. It’s a good thing going forward.

The US Federal Reserve hiked interest rates to fight inflation and that fight could be nearing an end. Disinflation might pave the way for the central bank to begin making cuts next year.

Markets are pricing in at least two cuts in 2024. Goldman Sachs believes the first of these cuts will come in the third quarter next year. The CME’s FedWatch tool is showing a 40% probability of a cut by March 24.

Interest rate cuts could support further moves higher in Bitcoin and crypto prices since risk assets typically perform better in low interest rate environments.

Market watchers will be keeping an eye on Fed Chair Powell’s remarks on Wednesday for any hints of what’s to come. If the central bank chief makes dovish remarks, it could send the market higher on improved hopes of impending rate cuts.

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Cleanse

Prices dipped at the beginning of the week in what might have been a leverage adjustment. This “can be painful but is usually good news,” wrote Noelle Acheson, author of the Crypto is Macro Now newsletter.

The crypto futures market flashed warning signs last week, which suggested that leveraged speculation was getting a little too heated. Meaning, traders were increasingly using borrowed funds to speculate.

“We can see this in the funding rates, which are what traders pay to take long or short positions in crypto perpetual futures,” Acheson said.

Bitcoin funding rates spiked to the highest level since November 2021 on Saturday, she added. The same month Bitcoin reached a record high around $69,000. The spike in funding rates led to selling and unwinding of leveraged long positions, Acheson added.

This is a common occurrence in crypto markets.

“Usually, prices resume their previous trend once the dislocation has been digested. And these drops can be seen as a healthy cleanse of excess leverage. Indeed, Bitcoin funding rates are now back to more normal levels, and the tailwinds for Bitcoin and others are still strong,” Acheson said.

Crypto market movers

Bitcoin slipped 1% to trade at around $41,400.
Ethereum traded around $2,200, down 0.6% since Monday.
Altcoins popped overnight. Cardano’s ADA jumped 9%, Avalanche’s AVAX increased by 12% and Polkadot’s DOT added 8%.

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Adam Morgan McCarthy is DL News’ London-based Markets Correspondent. Got a tip? Reach out at adam@dlnews.com.