Since the end of November 2022, Bitcoin has gained almost 100% due to moderating inflation, a slowing pace of rate hikes, and a banking crisis. At the moment, major media are screaming that bulls completely dominate the crypto market and “whales are buying the dip”. However, in the week ending April 23, BTCUSD lost about 10%, the worst weekly result since November 2022. This article will describe the reasons that may cause the crypto market to slide even further and the technical setups of two cryptocurrencies. 

Risk of Recession

A potential US economic recession is one of the main factors putting pressure on risky assets. If we turn to macro data, there are eight key indicators that are in the negative zone:

• CPI (March 2023): 5%, still 3% above the Fed’s target. That’s why experts and analysts are concerned about the Fed’s methods to decrease inflation. 

• ISM Manufacturing PMI: 46.3. In March, the index remained below 50 for the fifth month in a row, highlighting a slowdown in the economy. 

• The Conference Board Leading Economic Index lost 1.2% in March 2023 to 108.4, following a decline of 0.5% in February. The index is down 4.5% over the six months between September 2022 and March 2023—a steeper rate of decline than its 3.5 percent contraction over the previous six months (March–September 2022). This is another factor supporting claims that the economy is heading toward a recession. 

• Initial Jobless Claims: 228K on April 6, 239K on April 13, and 245K on April 20. In April, an increasing number of people lost their jobs and applied for unemployment benefits.

• NFIB’s Small Business Optimism Index decreased 0.8 points in March to 90.1, marking the 15th consecutive month below the 49-year average of 98. 24% of owners reported inflation as their most important business problem, down four points from last month. Small business owners expecting better business conditions over the next six months remain at a net negative 47%.

• The NAHB Home Builders Index gained two points in March to a preliminary reading of 44. This is the fourth month in a row when the index increased. However, the index is still down 35 points from a year earlier. Simply put, US home builders are not optimistic.

• Treasury Yield Curve (10Y – 2Y) – (-0.62%). An inverted yield curve occurs when yields on short-term bonds rise above those on longer-term bonds of the same credit quality, which has proven to be a relatively reliable indicator of an economic recession. The gray bars throughout the charts indicate past US recessions since 1967. Historically, recession starts when the treasury yield spread rises above 0.

The above key indicators indicate that the risk of a recession in the United States is extremely high, and investors typically prefer to get rid of risky assets during a slowdown in the economy, which could put a lot of pressure on the cryptocurrency market soon.

Banking crisis

A little more than a month has passed since the bankruptcy of Silicon Valley Bank, but armageddon in the US financial system has not happened. Has everything bad happened already, or is it just a break now? The situation is twofold:

• On one hand, the Fed and Treasury Department, not only with words but also with actions, made it clear that “they will not leave their people in trouble.”

• On the other hand, rising interest rates threaten recession, defaults, and a wave of bankruptcies in the corporate sector.

On the credit end, the major concern is that rating companies have had to revise credit ratings downwards in the recent months. According to Barclays PLC, in the US alone, about $11.4 billion worth of bonds were downgraded to high-yield (junk) status in Q1. The bank is also forecasting another $60 to 80B of downgrades by the end of 2023, representing about 2.2% of BBB corporate tier bonds.

From a deposits perspective,  a further decline in deposits will likely force financial institutions, particularly those who are smaller, to increase their interest rates in order to attract deposits, even when the Fed takes a break in raising rates. As a result, regional banks’ net interest margin is likely to fall eventually. Banks will likely continue tightening lending conditions to compensate for losses and reduce risks.

The problem is that in most US counties, SMEs account for 90% of loans to small businesses. Therefore, despite the support from regulators towards banks, these SMEs will likely see a tightening of credit, especially given the more than possible continuation of the growth of rates. A tightening of credit conditions will likely cause the US economy to slow down, putting further pressure on risk assets. 

The rate cut negatively affects the markets

Today, most young investors believe that monetary easing by the Federal Reserve will inevitably send risky assets, including cryptocurrencies, to the moon. However, in reality, the situation is different. Historically, risk assets – typically represented by the stock market – decline while the Federal Reserve cuts rates. In the chart below, you can notice this correlation during the S&P500 index’s decline in 2000, 2008, and 2020.

There is a simple logical explanation for this. While raising rates is done to cool the economy in a period of overheating, lowering rates, on the contrary, is carried out by central banks to stimulate the economy during a slowdown or recession A rate hike of 25 basis points is expected at the next Fed meeting in May, which tells us that the figures presented above are not yet bad enough for the Fed to change the course of its monetary policy. This means we may anticipate an even greater deterioration in US economic indicators, which could lead to a risky asset dump. 

Note: Bitcoin lost 35% in May 2021 and 15% in May 2022. Will Saying “Sell in May and go away” work for the crypto market this year?

Technical outlook

BTCUSD, daily timeframe

In May-June 2022, BTCUSD formed a massive order block around $28,500 – $32,300, and recently the price demonstrated a solid reaction to this resistance. Several factors point to a possible continuation of this bearish momentum: 

• The price has formed a “bearish engulfing” on the weekly chart. 

• The daily chart shows a bearish divergence with the RSI indicator.

The closest support for this decline is $25,000, which are August 2022 and February 2023 highs. Moreover, this support matches the lower border of the rising channel the price is moving in. 

Thus, from FBS analysts’ point of view, there are two possible scenarios of BTCUSD middle-term movements: 

• The pair declines to $25,000 and bounces back inside the resistance block at $28,500 – $32,300, where holders will finally close their positions. After that, the price will reverse with targets of $25,000 and $18,900. 

• The pair declines to $25,000 and breaks through this level. In this case, the price will quickly move to the second target of $18,900 and even $15,565.  

ETHUSD, daily timeframe

The technical setup of ETHUSD is similar to BTCUSD. The price is moving inside the ascending channel with a massive rejection from the upper side. Moreover, the price has also formed a “bearish engulfing” on the weekly chart and a bearish divergence with the RSI on the daily chart. Although another retest of the $2,175 level is possible, the overall sentiment is highly bearish, with the major target at the lower channel’s border and the second target at $1,000 if the price breaks out of the channel.

US dollar index, daily timeframe

There is no secret the US dollar usually has an inverted correlation with risky assets, including crypto. On the higher timeframe, the US dollar index has formed massive support at 101.00. Moreover, the price is currently rounding above this level, highlighting the possibility of an upcoming reversal similar to February 2023. The closest target for this movement would be 105.60, a 4% gain. If this happens, the US dollar index can form a double bottom with the major target at 108.85, putting the crypto market under heavy pressure. 

Summary

This article analyzed the fundamental and technical picture of the American economy and cryptocurrencies. After analyzing macroeconomic indicators, at FBS we believe that the US economy may be facing further decline, which will put strong pressure on the markets for risky assets, including cryptocurrencies. The technical setup on Bitcoin and Ethereum charts seems to support this conclusion.

The FBS CFD-trading platform is the brainchild of investors from Western Europe interested in trading research and technical analysis. Founded in 2009, FBS had to provide global markets with transparent and trusted applications for professional and semi-professional CFD traders.

Today, FBS is an international brand present in over 150 countries. The brand unites several independent companies offering their clients opportunities to trade Margin FX and CFDs.

The companies include FBS Markets Inc. (licensed by IFSC), Tradestone Ltd. (licensed by CySEC), Intelligent Financial Markets Pty Ltd. (licensed by ASIC), and TRADE STONE SA (PTY) LTD. (licensed by FSCA).