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Why are bitcoin prices reacting to U.S. interest rates?

While inflation figures in the US have been rising month on month to near double digits, the country's Federal Reserve has continued its strategy of tightening monetary policy. The medium-term goal is to stimulate savings and control inflation by gradually raising interest rates, which makes it more expensive to obtain credit.

The US monetary authorities are walking a fine line, trying to tame inflation that could lead to recession. Indeed, America's economy was already in recession when a second consecutive quarterly contraction was announced on Thursday July 28th.

Rising interest rates could have an impact on Bitcoin as it makes loans that some traders take advantage of more expensive. By encouraging savings, liquidity is low and therefore risk appetite is low. On the other hand, expectations of a worsening economic outlook are causing nervousness in the markets.

The impact of rising US interest rates

The market reaction, including bitcoin and cryptocurrencies, was positive in the latest US rate hike by the Federal Reserve, which caused the prices of BTC and major stocks to rise. However, as this year's tally shows, the market reaction has been uneven.

The first increase this year was 0.25 per cent, or 25 basis points, on March 16. In this basis point (BPS) representation, 100 points are equal to 1%. Bitcoin and stock prices fell modestly immediately after the rate hike announcement, before quickly recovering to pre-announcement levels.

c6b10159d1b747400a4eabaddfda5d5cWhile the interest hike had little impact on the day of the announcement, that week marked the start of a bull market that ended in late March, sending prices to one of their highest levels of the year, above $48,000.

The second rate hike, announced on May 4, came during a six-week downward stretch in which the Fed also doubled its March rate hike and set it at 0.5%. This time, the market's reaction was the opposite of what happened in March: there was an initial rally after the announcement, but after closing near $40,000 on May 4, BTC lost 10% of its price the next day and continued to fall for four more days.

Prior to the price reversal, the initial upward reaction in March may have been due to Jerome Powel's claim that the Fed had ruled out a 0.75% increase. To be precise, the Fed decided to climb to 0.75 per cent, or 75 basis points, before inflation failed to take effect despite the rate hike it implemented on June 15 last year. This third increase also adds to the bearish streak BTC is experiencing, which not only led to the infamous losses in June; It also pushed prices to a 2022 low of $17,500.

What happened to the price of bitcoin in July?

The market has weighed two scenarios for Wednesday's gains: a repeat of 75 basis points or an application of 100 basis points. In fact, gave the most anticipated option, a 0.75% gain, leading to modest boosts for both stocks and bitcoin, and also extended the time frame for the next increase in holdings, to be announced on September 21.

So far, the rate hikes don't seem to have tamed inflation as much as the Fed hoped, and for bitcoin, the impact hasn't been clearly determined. Two increases boosted prices, and May and June were bearish; We will continue to wait for what may happen in September.

What happens to inflation over the next two months will be crucial to assessing the impact of the next inflation. An improving economy could lead to higher interest rates to mitigate their impact on bitcoin prices. But the most beneficial factor for prices is strengthening demand, which is likely to make Bitcoin more vulnerable to macroeconomic decisions.

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