Yellen’s Optimism May Weigh on BTC-USD

Janet Yellen hinted that the Federal Reserve could raise interest rates for a second time this year at the annual Jackson Hole economic Symposium, stating that the case for another hike had “strengthened”. The Federal Reserve Chairwoman stated,

“In light of the continued solid performance of the labor market and our outlook for economic activity and inflation, I believe the case for an increase in the federal funds rate has strengthened in recent months. Of course, our decisions always depend on the degree to which incoming data continues to confirm the committee’s outlook.”

Friday 2 September will see the latest numbers for the US labour market with the Non-Farm Payrolls, due 12:30 GMT.  We should expect a rate hike to materialize in September if the number of new jobs added exceeds 180,000. With improving labour market conditions, this may provide enough confidence for the Fed to continue its path of monetary tightening.

Elaborating further on the case for gradual interest rate hikes, Yellen notes there is a risk that keeping rates low will hinder the central bank’s ability to fight any recession in the future.

“Forecasts now show the federal funds rate settling at about 3 percent in the longer run,” Yellen said. “In contrast, the federal funds rate averaged more than 7 percent between 1965 and 2000. Thus, we expect to have less scope for interest rate cuts than we have had historically.”

Yellen also discussed the tools at the disposal of the Federal Reserve if the US were to enter another recession. The central bank would most likely turn to bond-purchase programmes such as those implemented in response to the 2008 global financial crisis but Yellen did not make any mention of negative interest rates.

In contrast to their European and Japanese counterparts, who have already started experimenting with this unconventional monetary policy, the Federal Reserve does not want to go down this road, well not just yet anyway, which is a positive for the US Dollar.

Therefore, it could be a good week for the US Dollar and consequently push BTC-USD lower. As the market is likely to  expect a rise in the future interest rate in the US, this boosts demand for the US dollar, as well as its value as a consequence, since a higher interest rate implies a greater return for investors involved with interest-bearing assets and confidence in the US economy.

The chart below shows the Dollar Index, a trade-weighted index of the value of the US Dollar. On Yellen’s comments, the Dollar Index was able to erase the losses from the previous week and now looks to head higher toward 100. The conversion (blue) line is starting to trend higher and has moved above the base (red) line, suggesting bullish momentum is in play for the US Dollar.

While the market is anticipating a rate hike in December, the Fed’s James Bullard recently said that September may be the best time to raise rates. Therefore, the Fed could catch markets off guard by raising rates next month and provoke a bullish run for the US Dollar.

“If we got to a meeting and we felt things were looking stronger, that might be a good time to do that.”

The long-term outlook for BTC-USD is displayed below with the weekly price action on the Bitstamp exchange. This week has seen relatively muted price action suggesting we should be on the lookout for signs of a change in momentum. This week, bitcoin established a bullish breakout but buyers were cut short at $585.

Since the price action closed below the conversion line (blue) at the end of July, the conversion line has provided resistance since then. For example, this week saw the conversion line at $585.13 and BTC-USD has been pushed down from this price to around $570 at the time of writing. Therefore, we should look to enter long-term sell positions around the conversion line as it should continue to provide resistance.

Also, notice that the chart below shows that the conversion line is crossing below the base (red) line signalling a shift from bullish to bearish momentum. Consequently, BTC-USD could be ready to take a long-term plunge towards the fractal support at $465.28. The Awesome Oscillator also indicates a shift toward bearish momentum as the value of the oscillator is decreasing.

Therefore, BTC-USD looks like a long-term sell and could be exposed to further downside in the week ahead. Alternatively, bitcoin holders could use Coinapult to lock their bitcoin into US Dollars and insulate themselves from a long-term dive. The technicals point to bitcoin extending as low as $465.28 if the Fed move to raise rates at its next meeting.