MARKET COMPASS
Should Global Anxiety Increase or Decrease?
Digital assets are preparing to leave behind another relatively better week. Cryptocurrencies, which have suffered significant losses in the shadow of global developments, seem to close this week with value gains after the previous week. We can say that the most important dynamic behind this is the easing of tariff tensions between the US and China.
Both Trump’s more moderate approach and the flow of information about China’s willingness to negotiate on tariffs helped ease tensions. While it may still be months before the issue is fully resolved, we have more evidence that the worst may be behind us. So we can justify investors being less worried about this issue than in recent months. However, there is another issue to think about that could flare up, which again poses significant risks for the markets; “Recession”…
The US quarterly growth data released last week showed that the world’s largest economy contracted by 0.3% in the first quarter of the year. It is worth noting that it was already known that Trump’s harsh tariffs would have a consequence, which we have seen with the data in question (GDP). However, if the economy continues to contract, things may reach a more difficult stage. Therefore, it will be useful to watch the macro indicators for the US economy much more closely in the coming days. Although it looks good, the results of the Federal Open Market Committee (FOMC) meeting of the Federal Reserve (FED) may play a decisive role in determining the pricing behavior in the markets for the short and medium term after the April employment data and the GDP data. In other words, it would not be wrong to say that next week’s flash development will be the FOMC meeting and the assessments of the Bank’s Chairman Powell.
May 7 – FOMC Meeting
The third meeting of the year of the US Federal Reserve (FED), whose independence was questioned, albeit for a short time, with Donald Trump’s statements, will be held on May 6-7. Although Trump later stated that he had no intention of firing Fed Chairman Powell, he continued to call for interest rate cuts. Markets do not expect a rate cut from the Federal Open Market Committee (FOMC) on May 7. However, possible clues on when the next rate cut might be made have the potential to be a determining variable for the direction of the markets in the short term. Therefore, it would not be wrong to say that all financial markets will closely monitor the FOMC decisions on May 7th.
The Fed’s current policy rate is in the range of 4.25%-4.50% and no change is expected at the next meeting. According to CME Group’s FedWatch Tool, at the time of writing, the probability of a 25 bps rate cut at the upcoming FOMC meeting, which ends on June 18, is priced at around 55%. Following the latest pricing, four rate cuts of 25 bps each are expected by the end of the year (three were priced in ahead of the GDP data).
On May 7th, the FOMC will not update its dot plot and economic expectations. Therefore, the markets will focus more on whether there is a change in the interest rate and what the forward guidance is on this issue. We believe that the FED will leave interest rates unchanged at this meeting. However, it is worth noting that if there is a surprise rate cut, this could have a positive impact on digital assets. If, as widely expected, rates are left unchanged, the markets will quickly look at the Bank’s decision text, which may provide information on the rate cut path. Statements on employment and inflation will be important at this point.
If the Fed sends a message that a rate cut is likely at the next meeting, we could see appreciation in financial instruments that are considered relatively risky. However, if there are strong messages that there will be no rush for another rate cut, as mentioned by the Bank’s Chairman Powell and some other FOMC members in their recent statements, it would not be wrong to say that this may put pressure on instruments, including digital assets.
Half an hour after the decision, attention will turn to Powell’s press conference. The possible effects of trade wars on the US economy, the independence of the FED and economic developments will be among the topics that will be carefully monitored during the Q&A session. However, we can say that the crucial issue will be the timing of the FED’s next interest rate cut move amid all these dynamics. Powell’s clues may be a decisive dynamic for the direction of prices in the short term.
Digital Compass
In the US, the locomotive of the world economy, we consider the strategic crypto reserve, which started with Trump’s nomination process, as a very important development. However, the fact that the markets had already priced in the “best case scenario” before and after the US elections and the “less than perfect” news on this issue put pressure on digital assets. We continue to keep the strategic reserve issue in our equation as a positive variable for cryptocurrencies in the long run. On the other hand, we think that there is no new news flow that will create pressure in the medium term, there will not be a development that will create enthusiasm in the crypto market, and concerns that global economic activity may slow down in global markets, especially with Trump’s tariffs, will gradually decrease. Accordingly, we soften our view that “pressure may continue in the medium term” and align it with our long-term bullish outlook. In the short term, markets will continue to be sensitive to macro indicators and tariff developments.
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