Bitcoin and ether retreat as Fed rate cut optimism wanes

Risk assets stumble as rate cut certainty evaporates

The cryptocurrency market has endured a sharp correction over the past two trading sessions as traders begin to question the certainty of aggressive Federal Reserve (Fed) rate cut optimism in September ahead of Friday's inflation data release. Bitcoin has retreated 4% falling below the psychologically important $110,000 level, while ether has suffered more pronounced losses of 8%.

This shift reflects broader concerns about persistent inflation pressures that could force the Fed to maintain a more cautious approach.

Whale activity and ETF flows signal bitcoin to ether rotation

Despite the broader market turmoil, sophisticated investors are orchestrating a strategic pivot from bitcoin towards ether. This rotation includes high-profile whale transactions, most notably one bitcoin whale liquidating $2 billion worth of holdings to establish substantial ether positions. The migration reflects rising institutional interests in ether as corporates look to grow their crypto treasury.

Exchange-traded fund (ETF) flows corroborate this institutional shift. Bitcoin spot ETFs recorded substantial net outflows totalling $1.2 billion between 15-22 August, though yesterday's $219 million inflow suggests bargain hunters emerged following the price decline.

Ether's ETF story presents a markedly different narrative, with $151 million of net inflows since 15 August. This divergence reinforces whale observations, indicating professional investors are becoming increasingly discriminating in their cryptocurrency allocations.

Options markets signal divided sentiment

Derivatives markets offer additional insight into trader psychology, with Deribit options data exposing sharply divided opinions on bitcoin's near-term trajectory. Call options expiring 26 September with $140,000 strikes command similar open interest to $95,000 put options.

This suggests genuine uncertainty rather than directional conviction, with the $45,000 spread between these levels highlighting expectations for continued extreme volatility. Options traders are clearly preparing for substantial moves in either direction.

Ether's options landscape appears more constructive, with heavy call option clustering around $4,000 and $4,500 strikes and much lower put interests. The concentration of call interest at these levels may create technical support.

Figure 1: Divided views on BTC for options expiring on 26 September

Figure 2: Elevated interest in ETH call options at $4000 & $4500 expiring on 26 September

Technical charts reveal bitcoin weakness, ether resilience

Bitcoin's technical deterioration has accelerated, with the relative strength index (RSI) plunging below the neutral 50 level. This breakdown typically signals building bearish momentum and often precedes more substantial declines.

The current price action fits Elliott Wave Theory's corrective Wave A pattern, suggesting this selloff may represent just the initial phase of a deeper pullback. The $110,000 psychological support level has provided temporary respite but looks increasingly vulnerable.

Should this level fail, attention turns to the 38.2% Fibonacci retracement around $105,400, derived from the recent rally peak at $124,496. Any recovery attempts will likely encounter stiff resistance near $117,400, a level that acted as resistance last week.

Figure 3: Bitcoin (daily) price chart

While ether has declined alongside bitcoin, several technical indicators suggest underlying strength persists. The RSI remains above 50, indicating bullish momentum hasn't been extinguished, whilst ether continues trading above all major moving averages.

The 20-day moving average near current levels represents the first line of defence. A successful hold here could signal the corrective phase has concluded, potentially enabling another assault on fresh record highs.

However, failure to maintain this support would shift focus towards August's low around $4,060, where longer-term investors might emerge to provide more substantial buying interest. Any recovery attempts will need to clear previous resistance levels to confirm the uptrend remains intact.

Figure 4: Ether (daily) price chart

Key data releases threaten further crypto volatility

Friday's core PCE release stands as this week's most significant market catalyst, with the potential to dramatically reshape cryptocurrency trajectories. Recent inflation readings have delivered unwelcome surprises, with core Consumer Price Index and Producer Price Index both exceeding forecasts. Producer prices recorded their sharpest monthly increase since March 2022 as businesses adjust pricing to accommodate higher tariff-related costs. This development raises genuine concerns that core PCE could breach the 0.3% monthly consensus estimate.

Next week's employment data will add another layer of complexity to Fed policy deliberations. JOLTS job openings and non-farm payrolls could dramatically shift expectations for September's Federal Open Market Committee (FOMC) meeting.

An above-consensus inflation reading combined with robust employment data may derail the Fed's rate cut decision on 17 September, causing risky assets to tumble further. Conversely, softer readings could rapidly restore appetite for equities and cryptocurrencies.