Next week could prove crucial for markets, including Bitcoin, as seven major central banks, including the powerful Federal Reserve, announce rate decisions amid a war-induced surge in oil prices that threatens to reignite inflation in the global economy.
The week’s busy economic calendar includes the Reserve Bank of Australia (RBA) rate decision on March 17, followed by the Bank of Canada (BOC) and the Fed on March 18, and concludes with the Bank of Japan (BOJ), the Swiss National Bank (SNB) and the European Central Bank (ECB) on March 19.
Until recently, markets expected most major central banks, led by the Fed, to steadily cut interest rates (or avoid tightening them) this year. The rapid emergence of artificial intelligence as a disinflationary force – potentially disrupting the labor market – has reinforced this trend towards lower borrowing costs. This outlook supports risk assets, including Bitcoin.
However, the war that began on February 28 with coordinated strikes by the United States and Israel against Iran, which has since led to widespread retaliation and disrupted energy deliveries across the Middle East, has undermined this outlook.
Rising oil prices have reignited concerns about inflation, forcing traders to reassess their interest rate expectations. Some fear that central banks will respond to changing inflationary macroeconomic conditions by increasing borrowing costs.
As such, next week’s hawkish hints could trigger downward volatility on risk assets, including Bitcoin. This scenario seems plausible, as policymakers – remembering their 2021-2022 misstep when they called inflation transitory and got it wrong – could be very quick to rein in rising price pressures this time around.
If they remain neutral or data-dependent in a wait-and-see mode or downplay inflationary fears, then risk assets could rise significantly. This possibility cannot be excluded either.
“As with all supply shocks, the Fed’s first response to a spike in oil prices is to observe 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 slow 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, but reverse the trend weeks later,” he explained.
Historically, only the Fed – and perhaps the BOJ – have had significant influence over Bitcoin prices. With oil prices already straining every corner of Japanese society, next Friday’s BoJ decision could prove particularly crucial for domestic markets and for Bitcoin.
