It is fair to say that the markets have started 2023 stronger than most imagined. Can we have confidence that the bottom is in, or do we have to operate with caution to avoid a potentially huge bull trap?

As of the 14th January, Bitcoin has only seen 2 red daily candles this year and they were very small. In  the second week of January, we have so far had 6 consecutive green daily candle closures!

What has caused the rally?

Ok, everything has aligned perfectly for Bitcoin- US Dollar is down, USDT dominance down, S&P500 close to breaking the one year downtrend, but as always the US Federal Reserve are at the heart of the movement.

CPI is down again- On 12th January, the CPI reading for December was released. This showed inflation in the US at 6.5% year over year. This is down on the November reading (7.1%,) and a big move down from the peak of 9.1% in June.

Whilst everyone is focusing on these overall figures, believe me, The Fed are watching the price increases in food and energy far more than people think. This affects most Americans, and absolutely is important when considering their future monetary policy.

Food inflation, year over year in December, was still above 10%. This is a direct impact on almost every Americans wallet.

In December, energy prices fell but this can be linked to a recessionary environment. During a recession there is less economic activity and therefore less need for energy use. Less demand means lower energy prices!

Services Excluding Housing- This was up 7.4%. This places a focus on the Labour market. This figure will cause a concern to the Fed as it highlights the overheating of the Labour market, and a shortage in employees pushes towards wage inflation.

How are the public feeling?

According to the Federal reserve report for December, more people think they have a greater chance of losing their job in 2023 than they did at any time during 2022. It also revealed that people think it is going to be harder to obtain credit in the coming months. This is VERY important- thoughts affect behaviour and the behaviour affects supply and demand in the economy.

Decision Time!

On 1st February 2023, the Fed will have their first FOMC meeting on the year, and they have a very big decision to make! Will the continue with another 50 bps rate rise, or will they reduce this to a 25 bps rise for the first time this economic cycle?

The Fed expect to have inflation down at around 3% by the end of 2023, and closer to 2% by 2025. To achieve this, it is likely that interest rates will need to remain high for quite some time. In 2022, the rates were risen 7 times, and currently sits at the highest level since 2007.

At the December meeting, the minutes indicated that they expect to go with another 50bps rise in February. However, more bank Presidents are hinting at a 25bps rise now, saying it would be “considered” if the CPI print shows that inflation is slowing in line with their other readings. Clearly, 25bps is now on the table with 50bps.

In my personal opinion, I do think that 25bps is more likely as this supports the idea of a “softer landing,” but it is certainly not as clear cut as people think.

Considering that more than 90% of people are now pricing in a 25bps rise, if this comes in at 50bps we can expect a sharp pullback across the markets.

If the expected 25bps is the decision, this could further extend the current rally in stocks and crypto.

So at this meeting, or the next, the interest rate will go above 5%. Most members have said they then expect the rates to remain at 5% “for a long time, but this is not in line with what the market is expecting.

The truth is, how long we stay at 5% or above will be decided by how fast inflation continues to fall. But we must also keep in mind the economic impact. JPMorgan have said that they expect credit to be harder to obtain, and this will affect businesses too. There will be major companies, who rely on credit, potentially forced into very difficult positions. Whilst the interest rates remain above 5% I feel there could be some major companies going bankrupt.

All things considered, my opinion is that we will see further downside before a real turn to the upside. Whilst the news now is positive, the damage that the rates will do to the economy in the medium term will shift to a negative sentiment.

So whilst the perma-bulls of Crypto Twitter are claiming victory, and the perma-bears are in hiding, as always ignore the noise. We trade what the charts tell us. We make money both ways!