Gate Labs: Rate Cut Cycle Approaching, Market Set for Reversal?

Gate 研究院

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With the weakening of the US dollar and the Fed set to begin cutting rates, emerging markets and cryptocurrency may benefit

Source: Gate Research Institute

Federal Reserve Chairman Powell recently expressed his view that three consecutive inflation data favor rate cuts. The market generally expects the Fed to implement two rate cuts this year, and the expected series of rate cuts is expected to significantly increase market liquidity, having a significant positive impact on the cryptocurrency market, indicating that more funds may flow into this area.

Summary:

· After the June CPI data was released, the market generally expects the Fed to take rate-cutting action in September, and Fed officials have publicly stated that the time for rate cuts is approaching.

· In the short term, the rate cuts initiated by central banks worldwide, with the Fed as the representative, have undoubtedly injected a shot in the arm for the cryptocurrency market. As market liquidity significantly increases, rate cut expectations will directly trigger market optimism.

· The rate-cutting prelude opened by central banks globally has brought new opportunities and challenges to the crypto market, requiring investors to conduct comprehensive analysis and participate rationally.

Introduction

Recently, the Bank of Canada and the European Central Bank, as followers of this round of rate hikes, chose to cut rates ahead of the traditional path when inflation did not meet the expected control target to address global economic slowdown and economic pressures in various countries. Although the Fed has not officially cut rates, given the significant slowdown in inflation data over the past three months, Fed officials have hinted at the ripe timing for rate cuts. The market expects the Fed to potentially start rate cuts in September, and the crypto market has begun to rebound due to loose liquidity expectations. This article will discuss this in detail.

Europe Cuts Rates First, Fed to Follow Soon

Recently, as followers of this round of rate hikes, the Bank of Canada and the European Central Bank chose to cut rates ahead of the traditional path despite inflation being above target to address global economic growth slowdown and the multiple economic pressures faced by countries around the world.

Although the European Central Bank took the first step in rate cuts, the Fed has not yet cut rates. However, with the June CPI data showing the first month-on-month negative turn in four years and the core year-on-year growth rate hitting a three-year low, Fed officials publicly stated that the timing for rate cuts is approaching. The market generally expects the Fed to start taking rate-cutting action in September.

In fact, Federal Reserve Chairman Powell has recently spoken multiple times on inflation and the economic situation, revealing the Fed's subtle stance on policy adjustments. In his remarks this week, he further stated that the trend of inflation and economic slowdown is largely consistent with the Fed's expectations. In particular, the second-quarter inflation data has somewhat strengthened the market's confidence in declining inflation, especially as the pace of price increases is steadily returning to the Fed's 2% target, indicating that the window for rate cuts may soon open.

He also mentioned that the labor market is currently in a more balanced state, and if there is unexpected softness in the future, it will also be one of the considerations for adjusting interest rates.

The market reacted strongly to this dovish tone. The Chicago Mercantile Exchange (CME) FedWatch tool shows that the market broadly expects the Fed to announce a rate cut at the September policy meeting, with this expectation almost reaching 100% certainty.

It is worth noting that this week the market will closely monitor key economic data for June in the United States, including retail sales, industrial production, and weekly jobless claims. These data are expected to provide more clues for assessing the strength of the U.S. economy, which will in turn affect the market's expectations for the timing of the Fed's rate cut. Gate Research will also continue to follow up on and analyze these developments.

Overall, with easing inflation pressure and adjusted economic growth expectations, a Fed rate cut has become a widespread consensus in the market. This is undoubtedly a long-awaited positive signal for the cryptocurrency market.

Will a Rate Cut Directly Benefit the Crypto Market? Yes or No

Although the market is currently filled with interpretations of the positive impact of a rate cut on the crypto market, we have also seen some cautious analyses.

Generally, a rate cut is seen as a catalyst for increased market liquidity, as the reduction in borrowing costs will stimulate investors' investment enthusiasm. This enhanced liquidity often penetrates into emerging markets such as cryptocurrencies, thereby driving up their prices.

Furthermore, in a rate cut environment where economic uncertainty increases, investors tend to seek safe-haven assets. Bitcoin and other cryptocurrencies, with their unique characteristics such as decentralization, fixed supply, and ease of preservation, gradually become a new hedge option, naturally further enhancing their market attractiveness and price.

Despite the market's anticipation of a rate cut, many institutions generally believe that caution is necessary in a complex and ever-changing market environment. For example, a Morgan Stanley strategist predicts a possible 10% pullback in U.S. stocks, while Goldman Sachs expects a large outflow from U.S. stocks in August, waiting for clearer election results.

This cautious attitude is mainly based on concerns about a possible U.S. economic recession. In the course of the financial crises in 2001 and 2008, although the Fed initially implemented rate cuts, the market briefly reached highs but then experienced a sharp downward trend, even with the Fed rapidly and significantly lowering rates, it was unable to effectively contain the further spread of the crises. The root cause of these two crises can be traced back to the successive bursting of the dot-com bubble and the real estate bubble, which had a profound recessionary impact on the economy.

As for whether the current interest rate cut policy will repeat past mistakes, triggering events such as an artificial intelligence bubble or a U.S. debt crisis, and thereby dragging down the crypto market, caution is still warranted.

Under Multi-Factor Disturbances, Crypto Market May Steadily Rise

In fact, in the short term, the global interest rate cuts led by the Federal Reserve have undoubtedly injected a shot in the arm for the cryptocurrency market. Undoubtedly, with significantly increased market liquidity, the interest rate cut expectations have directly triggered market optimism, potentially leading the cryptocurrency market to experience a short-term uptrend, providing investors with a quick profit opportunity.

However, in the long run, the trend of the cryptocurrency market will be influenced by more complex and varied factors, and price fluctuations are rarely driven by a single factor, requiring a comprehensive analysis.

Firstly, the strength of economic recovery is one of the key factors determining the market trend. If the interest rate cut policy can effectively boost the economy, improve the overall economic environment, the cryptocurrency market is expected to benefit from it, enjoying the dividends of economic growth. Conversely, if the economic recovery falls short of expectations, market confidence is undermined, and cryptocurrencies naturally struggle to stand alone, as seen during the 2020 COVID-19 pandemic when Bitcoin experienced a 31.2% crash alongside the stock market and commodities.

Secondly, inflation pressure is another factor that cannot be ignored. Interest rate cuts by central banks are aimed at stimulating the economy but may also pose a risk of rising inflation. Once inflation soars, central banks may adjust their policy direction, considering raising interest rates to curb inflation, which will directly pressure the cryptocurrency market. Therefore, investors need to closely monitor global inflation data and central bank policy directions to timely adjust their investment strategies.

Moreover, the U.S. election and changes in the global regulatory environment have profound impacts on the cryptocurrency market. With the rapid development of the market, global regulatory agencies are paying increasing attention to it. While Bitcoin and Ethereum spot ETFs are gaining regulatory approval, they also bring more regulatory scrutiny, so the future regulatory policy direction will directly impact market stability and development prospects.

Despite the many uncertainties, the opportunities brought by the interest rate cut to the cryptocurrency market should not be ignored. We believe that the loose monetary policies of central banks such as the Federal Reserve are expected to provide more liquidity support for cryptocurrencies like Bitcoin, driving the continuous development of the market. Additionally, as the regulatory framework gradually improves and the market matures, cryptocurrencies are expected to play a greater financial role in the future, creating more wealth opportunities for investors.

In conclusion, the global central banks' initiation of interest rate cuts has undoubtedly brought new opportunities and challenges to the crypto market. This includes not only bullish factors such as increased liquidity and heightened safe-haven demand but also challenges posed by lessons from past financial crises and other complex factors. We believe that despite the perpetual long and short game in market prices, within a more constructive regulatory framework and against the broader backdrop of expanded crypto real-world use cases, digital asset innovation and adoption will serve a broader community of users and unlock more innovative value.