Cryptos are not recovering; there´s concern about the Fed's possible change of course

Cryptocurrencies are not recovering. Bitcoin (BTC) continues to falls after dropping 1.2% in the last 24 hours and sinking below $26,800. For its part, ethereum (ETH) falls 0.7% and is trying to consolidate at the $1,850 level.

The truth is that the reigning cryptocurrency seems to continue the path taken in May, the first month of 2023 that ended with losses after bouncing more than 60% between January and April. According to Mikkel Morch, president of cryptocurrency investment fund ARK36, BTC has been pressured lower by the latest comments from Cleveland Federal Reserve (Fed) chairwoman Loretta Mester.

"These remarks have had a disruptive impact on various risk assets, including cryptocurrencies. Simultaneously, the release of discouraging manufacturing data from China has added to the bearish sentiment surrounding Bitcoin and other risk assets," he explained.

In an interview with the UK's 'Financial Times', Mester said there was "no compelling reason" to support a pause in interest rate hikes in June, but rather the opposite. "I would see more of a compelling case for bringing (rates) up . . . and then holding for a while until you get less uncertain about where the economy is going," she stressed, though she does not have a vote on the Federal Open Market Committee (FOMC) this year.

The Cleveland Fed president has not been the only one to speak out. Governor Philip Jefferson indicated that a pause does not mean an end to hikes, while Philadelphia Fed President Patrick Harker favored giving the market a breather. "If we're going to get into a period where we need to do more tightening, we can do it every other meeting. We don't have to do it every meeting," Harker stated.

These comments only underscore what the central bank's recent minutes made clear: the division among members is evident and palpable and there are plenty of options for the Fed not to follow the planned roadmap. On the other hand, the Beige Book was published yesterday, which indicated that, between April and early May, "expectations for future growth deteriorated somewhat", although in some districts of the country "they largely expected a further expansion of activity". Moreover, the consensus now expects, according to CME's FedWatch tool, a pause in hikes (68% probability) rather than a 25 basis point hike (32%).

"The dollar index is still very much holding on to the gains, as are the US 2-year Treasury yields. Two factors show that market players believe that there is still one more interest rate hike in the pipeline before the Fed pauses its process of raising interest rates," noted Naeem Aslam, chief investment officer at Zaye Capital Markets.

On the other hand, the debt ceiling continues to be a focus of interest for cryptos after largely conditioning their latest movements. On Wednesday, the House of Representatives gave the go-ahead to the agreement between the White House and the Republican Party and the text will now pass to the Senate. It should be recalled that the Treasury Department warned that it will run out of money to pay the debts of the world's first economy next June 5.

"Even if the bill passes in the Senate, the thing about the debt ceiling is that we are only kicking the can down the road, and investors do know that there isn’t much road left. The debt ceiling drama always hurts the US's reputation about paying its debt obligations, and this is exactly what happened this time as well, and sadly, this isn’t the last time," Aslam pointed out.

Finally, cryptocurrency market traders are also keeping an eye on macroeconomic data due in the coming days. Tomorrow, on Friday, the US will release the May employment data, while the latest inflation reading will have to wait until June 13.

In the rest of the market, there have been generalized falls. Ripple (XRP) and Cardano (ADA) drop by around 2% and 3%, respectively. In contrast, Litecoin (LTC) rises 2.9%.