Crypto Verse: prices stall despite fundamental tailwinds

Crypto assets have lost steam despite persistent financial stability risks and the prospect of rate cuts from the US Federal Reserve this year. In this week’s Crypto Verse, we look at the drivers of crypto prices, preview this week’s US CPI release, and take a look at the technicals of Bitcoin and Ether.

Financial stability and bets on rate cuts support crypto prices

The macroeconomic backdrop remains positive for crypto prices. Financial stability risks have persisted in the United States, with several regional banks still on the brink of collapse. Although prices have rebounded in recent days, the share prices of regional banks remain under significant pressure.

The KBW Regional Banking index is down more than 30% in the past two months, raising the prospect of systemic risk through the banking system and pushing investors towards crypto assets.

The stress in the US banking system is expected to impact credit conditions and weaken US economic activity.

After last week’s rate rise from the US Federal Reserve, rates markets are implying a brief pause from the central bank before aggressive rate cuts. Currently, the Fed Funds Futures curve points to the potential of 75 basis points of cuts by the Fed before the end of the year, which would take rates back to 4.50%.

Rate cuts would be favourable for assets like cryptocurrencies, owing to the increased liquidity and the fact yields in safer assets would be less attractive.

When looking at “real yields”, which are nominal yields minus expectations for future inflation, conditions would appear less favourable for a non-yielding asset like crypto. The US 10-year real yield is still in positive territory.

However, they are moving lower, with rate cuts likely to support this trend.

Whether the US Federal Reserve can cut interest rates will depend on inflation falling back toward the central bank’s target.

US CPI figures this week are expected to show sticky price pressure in the economy, which may back up Fed Chairperson Jerome Powell’s comments last week that inflation will come down “not so quickly”.

Core inflation is expected to edge lower to 5.5% in April from 5.6% a month earlier.

Bitcoin and Ether prices lose momentum

Even with sustained tailwinds, crypto prices have lost momentum in recent weeks and look poised for a deeper pullback.

Bitcoin has hit firm resistance at $US30,000 and could arguably be carving out a head-and-shoulders pattern on the charts. Support at the 50-day moving average has also given way as the daily RSI signals negative momentum.

Support around $27,200 comes into view now, with a break of that level opening a potential drop toward $25,500.

Bitcoin daily chart

Meanwhile, Ether prices are succumbing to a similar loss in upward momentum.

The daily RSI has turned negative, with the price failing to break through resistance at $US2000. Some support is being provided by an upward-sloping trend line, along with support just above $US1800. A break below that level may open a deeper drop toward the low $US1700s.

Ether daily chart