BTC Retreats to $27K as Fed Official Mester Supports Continued Liquidity Tightening

Bitcoin (BTC) faced selling pressure in the early hours of Wednesday following comments from a high-ranking Federal Reserve (Fed) official who expressed no strong reasons to halt the tightening of liquidity. The continuous tightening measures implemented by the Fed have caused turmoil among risk assets, including cryptocurrencies.

In an interview published on Wednesday, Federal Reserve Bank of Cleveland President Loretta Mester stated, “I don’t really see a compelling reason to pause. I would see more of a compelling case for bringing the rates up and then holding for a while until you get less uncertain about where the economy is going.”

Futures associated with the tech-heavy Nasdaq index on Wall Street dropped by 0.38%, indicating a negative start on Wednesday. The dollar index, which tracks the value of the greenback against major fiat currencies, rose by 0.27% to 104.40. Meanwhile, gold remained resilient, trading 0.2% higher at $1,962 per ounce.

Bitcoin price

Since March 2022, the Fed has increased rates by 500 basis points to 5% in an effort to control inflation. Mester’s support for further rate hikes and the higher-for-longer approach aligns with recent expectations of increased interest rates in the United States due to unexpectedly high inflation data.

Recent official data released on Friday revealed higher-than-expected consumer spending in the U.S. during April, even as the Fed’s preferred inflation measure, the core PCE, rose to 4.4% on a yearly basis, up from 4.2% in March. As per the Fed funds futures, traders no longer anticipate rate cuts this year and have fully priced in a 25 basis point rate hike for June.

Over the past seven months, traders consistently hoped for a pause in the Fed’s rate hikes in the first half of 2023, with expectations of liquidity-boosting rate cuts in the latter half. This has been a significant factor contributing to Bitcoin’s year-to-date gain of over 65%. In April, the cryptocurrency reached a 10-month high of $31,000, while the dollar index decreased by over 12% during the same seven-month period.

Mester also mentioned that the debt ceiling deal eliminates a “significant element of uncertainty” from the U.S. economy.

During the weekend, U.S. President Joe Biden and House Speaker Kevin McCarthy reached a preliminary agreement to suspend the $31.4 trillion debt ceiling and avert default. Lawmakers must now navigate the deal through both the House and the Senate to avoid default.

Bitcoin Price Prediction

Once the deal is approved, the Treasury will begin to replenish its reserves by issuing bonds, effectively draining dollar liquidity from the system. This could be bearish for risky assets in general.

The bearish engulfing candlestick pattern serves as further confirmation of the downward momentum. Bitcoin has already reached the 61.8% Fibonacci level at $27,250 and is currently heading towards the next level of support around $26,950.

A successful breakthrough above $27,950 has the potential to propel Bitcoin’s price towards the subsequent support level at $26,500. A significant rise above $26,500 could trigger a bullish surge, leading to a potential resurgence of the previously broken resistance levels around $27,300 and $27,500.

Should the upward trend persist, Bitcoin may face the next obstacle at the $28,000 resistance level.

To summarize, it is crucial to monitor the support zone at $27,500 closely and remain attentive to possible rebounds in the vicinity of the $26,500 threshold for Bitcoin.

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