Fundamental analysis by Currency.com: Inflation pushes markets higher

In early June, the cryptocurrency market began to recover after May’s drop. But by mid-month Bitcoin and Ethereum had bounced off resistance zones. Along with them, gold prices fell, while equities continued to rise.

The analyst from the Currency.com crypto exchange, Mikhail Karhalev, explained why crypto bears will retreat soon, how the Fed disappointed investors, and where commodity prices are headed.

Cryptocurrencies

On June 8, sellers attempted to break the Bitcoin support zone around $32,000 on light volumes. By contrast, on May 19 buyers absorbed a much larger amount of market supply and pushed the price back to $42,000.

Weak selling would push the bulls to step up purchases and go on the offensive. Despite the corrections, the $40,000 resistance level is unlikely to hold for more than a few weeks. After it is breached, Bitcoin’s price could move toward $48,000. If there are no negative news during this period, the price will rise gradually and without corrections.

There are fundamental reasons for the current uptrend:

• inflation in the United States has reached 5%. This is a positive factor for risky assets — stocks, commodities and cryptocurrencies;
• Coinbase is preparing to offer cryptocurrency instruments to pension funds — among the largest investors in the market;
• 22 crypto ETFs are awaiting approval for launch in the United States;
• authorities in Iran and India are working on regulation and possible legalisation of cryptocurrencies;
• The Bank for International Settlements intends to regulate cryptocurrency regulation.

Currently led by Ethereum, the cryptocurrency market is moving downward slowly, but these fundamental factors will continue to push prices higher.

Equity markets

The Fed kept the policy rate at 0.25% per year and did not change its quantitative easing (QE) policy. Too aggressive action by the regulator would have led to a crash in financial markets.

FOMC officials forecast raising the rate to 0.5%, and then to 1% over three years. But that is unlikely to happen. Such a decision would carry large risks for the market. A similar situation occurred during the 2008 crisis: the Fed held rates steady for several years. Observations of U.S. monetary policy show investors are wrong in about 90% of cases when betting on an aggressive fight against inflation.

Also the price of stocks is influenced by a colossal glut of short money in the market: the Fed’s balance sheet is growing, while liquid money supplies M1 and M2 are at record highs. The volume of repo operations has reached a historic maximum. These facts indicate that investors have nowhere to put their money.

In these conditions, the inflationary spiral may pick up pace, perhaps after a brief slowdown. Even if U.S. authorities reduce the inflation rate, investors will continue to invest in risk assets such as tech stocks.

This year, markets do not expect ten-year Treasury yields to rise by more than 2.3%. That figure is below or in line with the Fed’s inflation target. Bond yields do not offset the decline in the dollar. Investors remain to seek returns in risk assets.

Commodities

Commodity markets were hit hardest by inflation and have entered a correction. The outlook for commodities depends on whether the Fed can convince investors of the mantra ‘inflation is temporary.’ If Fed members fail, commodity prices will continue to rise modestly.

Inflation is a secondary factor. For commodity prices, demand from producers is more influential. Oil, platinum, palladium, copper, steel and other commodities will continue to rise thanks to the rebound in production. Gold and silver have already begun to recover after a correction.