Crypto Week: Pressure on Digital Assets Continues Mounting

Central bankers have simultaneously started their monetary tightening and are expected to continue at a synchronized pace throughout the summer, not counting the interest rate hiking cycle break taken by the Federal Reserve (Fed). Some central banks, like the European Central Bank (ECB), continued to raise rates according to the expected schedule, while others like the Bank of England (BoE), accelerated their hiking pace.

Central bankers have to act almost in the same rhythm considering the nature of economic processes that are being observed on a global scale and considering the nature of the U.S. Dollar-centered global financial system. However, central banks have different room for tightening actions. The strong American economy provides more room for the Fed to counter inflation, while in the Old World a weaker economy limits such actions.

Thus, we may see the U.S. Dollar declining against other currencies, and the stock market rising. An understanding of economic developments could provide an answer to how long this situation will last. The U.S. Dollar is the guiding star for the movements of other assets, as the Dollar-denominated debt is considered the safest. The increase of the U.S. debt yields significantly limits reasons to buy other assets. In this situation stocks and cryptos suffer.

On the other hand, when the Greenback is weakens other assets may rally. This is exactly what is going on now after the Fed took a pause in its interest rate increase process. Still, U.S. central bankers have explicitly tuned their rhetoric into a hawkish one promising to resume interest rate hikes by the end of the summer or at the beginning of this autumn.

The weak point in the fight with inflation is the helicopter money that was poured into the economy during the pandemic. Americans used close-to-zero borrowing rates to accumulate substantial amounts of cheap loans, while market turbulence led to elevated rises of wages, mitigating the effect of inflation. Thus, high consumer activity is intact and recession risks are rather low. Such dispositions leave the Fed without any incentives to lower its rates, while taming inflation to reach its target is on the table. Considering this logic, higher-for longer interest rates and contracting liquidity for risky assets is the most realistic scenario. Global economic issues are here to make the Dollar the most wanted safe haven direction for investors.

Undoubtfully, as digital assets are the riskiest ones, they will experience this pressure and will hardly be able to resist it. Crypto prices may move long distances both up and down within the short term without a clear understanding of a specific direction in the long term. Thus, it is rather likely that we may see Bitcoin at $22,000 per coin and it may rather head lower than go up.