The cryptocurrency market is back in the green zone. After the bears failed to push Bitcoin below $40,000, buyers returned to the market, and the BTC/USD pair recovered to $42,000.
Despite the positive dynamic of recent days, further growth of the world's main cryptocurrency is still limited due to the complex macroeconomic environment, rising Treasury yields, and concerns over the U.S. stock market's downturn.
Theoretically, cryptocurrency assets should be traded regardless of the developments in traditional financial markets. But in reality, quite the opposite happens - not only doesn't Bitcoin ignore the general investor attitude to risk, but it also follows the price action pattern of risky assets and, above all, technology stocks.
Given that this correlation is becoming more pronounced, we can assume that the BTC rate will depend on the price movements of U.S. indices. The U.S. corporate sector is currently showing positive dynamics, supported by the earnings season that started last week.
Out of the 70 companies that have already reported their earnings, more than 80% performed better than expected. However, most analysts are reluctant to share the current enthusiasm, believing that companies' results may weaken at the final stage of the earnings reporting season. In addition, there is a high probability that the situation could get significantly worse in the second quarter.
The U.S. stock market may face pressure amid the monetary policy tightening in the U.S., surging inflation, continuing geopolitical risks, and uncertainty due to an economic crisis in Eastern Europe. If the Fed raises interest rates and borrowing costs, it will hit consumer demand and is likely to dampen investor appetite for risky assets, including cryptocurrencies.
The concurrent rise in government bond yields will also reduce the difference in returns. Investors will favor riskier assets such as securities and digital assets over safer government bonds. The benchmark 10-year U.S. Treasury yield rose to its highest since the end of 2018 this week, exceeding 2.9%.
Federal Reserve Bank of St. Louis President James Bullard, an FOMC voting member this year, said that he wouldn't rule out a 75-basis-point interest-rate hike. Let us recall that Bullard was one of the first Fed officials who advocated for an aggressive rate increase to tackle inflation.
Representatives of the U.S. regulator expect that an aggressive increase in the key interest rate coupled with a speedy reduction in the balance sheet will help curb inflation and prevent the economy from overheating.
The inevitable side effect of such a policy will be strengthening the U.S. dollar against all alternative assets, including cryptocurrencies. Taking this into account, we recommend not to rush into buying BTC, which could still slip to around $35,000.