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20 Sep 2022

All eyes on Wednesday's FOMC

All eyes are on the FOMC this week after yet another negative inflation surprise reaped havoc in crypto and equities alike.
FOMCvol
Source: FTX API (Minutely trade data during FOMC meetings) *Dates included: 2021: Apr 28th, Jun 16th, Jul 28th, Sep 22nd, Nov 3rd, Dec 12th. 2022: Jan 26th, Mar 16th, May 4th, Jun 15th, July 27th
The August CPI print exceeded expectations by 0.2% last Tuesday, leading BTC to plunge alongside equities, as YoY inflation printed 8.3%, while core CPI, which excludes volatile assets such as energy, rose 0.6%.
CPIshock
Preview
Source: Investing.com, Tradingview
BTC saw a massively negative reaction following the CPI release, ending the day down 10%. Nevertheless, the surprise impacted all risk assets, as the S&P 500 experienced its worst daily drawdown in 2022. The BTC drawdown was harsher than any previous CPI-related drawdowns this year. This brutal reaction is caused by expectations and uncertainty ahead of this Wednesday’s FOMC, where the market is pricing in a lofty interest rate hike.
Hikesize
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Source: CME Group
Currently, 75bps seems to be the base expectation, priced in the market with an 80% likelihood. However, there are also investors bracing for a possible 100bps hike, presently priced in at a 20% chance. The upcoming FOMC is particularly important. Jerome Powell has previously communicated that the outcome of the upcoming FOMC will rely heavily on macro data from July and August. Nevertheless, in a speech at Cato Institute, Powell emphasized that “History cautions strongly against prematurely loosening policy”, and the FED seems eager to combat inflation. All FOMC events have caused volatile markets in the last year, and active investors should be prepared for new bursts in volatility tomorrow as we elaborate further below.
Expect volatility during tomorrow's FOMC
FOMC meetings generate volatile markets, and their impact on volatility has increased as monetary conditions have tightened alongside interest rate hikes.
FOMCvol
Preview
Source: FTX API (Minutely trade data during FOMC meetings) *Dates included: 2021: Apr 28th, Jun 16th, Jul 28th, Sep 22nd, Nov 3rd, Dec 12th. 2022: Jan 26th, Mar 16th, May 4th, Jun 15th, July 27th
The FOMC hours are always volatile in the market. The attached chart illustrates the rolling minutely volatility of BTC amid prior FOMC meetings. It’s evident that the FOMC meetings tend to lead to higher volatility, and the effect has been particularly notable after the FED began hiking interest rates in March.The FOMC price action in BTC reflects the reaction of equity indexes, as BTC tends to move in a highly correlated manner during critical macro events.
FOMC perrormances
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Source: Tradingview
The observation of elevated volatility during FOMC illustrates the importance of the FOMC and the volatility that it offers. The two latest FOMC meetings have seen soaring volatility during the press conference, as Jerome Powell’s guidance further contributes to directionally impacting the market.
fomcvol2
Preview
Source: FTX API (Minutely trade data during FOMC meetings) *Dates included: 2021: Apr 28th, Jun 16th, Jul 28th, Sep 22nd, Nov 3rd, Dec 12th. 2022: Jan 26th, Mar 16th, May 4th, Jun 15th, July 27th
Active day traders should be aware of the volatility effects of FOMC and should prepare for a very volatile Wednesday. Volatility will likely be exceptionally high due to conflicting rate hike expectations. The market is pricing in a 20% chance of a 100bps hike. A “softer” hike of 75bps may thus reflect positively on the market, while further guidance in the press conference may act as a further catalyst for volatility. On the other hand, a 100bps hike would likely have a negative short-term impact on the market.Over longer time frames, this intraday volatility is irrelevant. Clues regarding the FED’s medium-term view, liquidity conditions, and the hiking cycle will have a prolonged directional impact on the market.
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