Next week could prove crucial for markets, including bitcoin, when seven major central banks, including the powerful Federal Reserve, announce rate decisions amid war-fueled oil price increases that threaten to reignite inflation in the global economy.
The week’s busy economic calendar includes the Reserve Bank of Australia’s (RBA) rate decision on March 17, followed by the Bank of Canada’s (BOC) and Federal Reserve’s decision on March 18, and concludes with the Bank of Japan’s (BOJ), Swiss National Bank’s (SNB’s) and European Central Bank’s (ECB’s) decision on March 19.
Until recently, markets expected most major central banks, led by the Federal Reserve, to steadily cut interest rates (or avoid tightening them) this year. The rapid emergence of artificial intelligence as a disinflationary force (with the potential to disrupt the labor market) had reinforced this bias in favor of lower borrowing costs. That outlook supported risk assets, including Bitcoin.
However, the war that began on February 28 with coordinated US-Israeli attacks on Iran, which has since involved widespread retaliatory strikes and disrupted energy shipments across the Middle East, has ruined that outlook.
Rising oil prices have revived concerns about inflation, forcing traders to reassess interest rate expectations. Some fear that central banks will respond to the evolving inflationary macroeconomic situation with higher borrowing costs.
As such, next week’s hawkish cues could trigger downside volatility across all risk assets, including Bitcoin. This scenario seems plausible, as the authorities (recalling their misstep in 2021-22 when they called for temporary inflation and were proven wrong) may be quicker to curb rising price pressures this time.
If they remain neutral or rely on data in a wait-and-see manner or downplay inflation fears, then risk assets could soar. This possibility cannot be ruled out either.
“Like all supply shocks, the Fed’s first response to an increase in the price of oil is to watch and assess the damage,” economist and Fed watcher Ethan Harris said in a LinkedIn post.
“There are two reasons for this hesitation. First, oil shocks simultaneously reduce growth and increase inflation. Before acting, the Fed wants to determine what the bigger problem is. Second, most of these shocks are transitory. The Fed does not want to change rates, only to reverse the movement weeks later,” he explained.
Historically, only the Federal Reserve (and possibly the Bank of Japan) has exerted significant influence over Bitcoin prices. With oil prices already putting pressure on all corners of Japanese society, next Friday’s BOJ decision could prove particularly crucial for both domestic markets and Bitcoin.
