Crypto Markets Daily Dec 18 2024

Cuts, Corrections and Caution

Setting the pace for the direction of global macro drivers, all eyes are on this evening’s FOMC meeting, where an expected 25-basis-point rate cut will lower the Federal Funds Rate target range to 4.25-4.5%. However, it is Fed Chair Jerome Powell’s subsequent press conference and release of the committee's Summary of Economic Projections (SEP) that is most anticipated, expected to provide crucial forward guidance on the trajectory of monetary policy for 2025. Tomorrow, Dec 19, 2024, U.S. initial jobless claims data will provide fresh insight into the U.S. labor market, with expectations at 230,000 new filings for unemployment benefits. This follows the surprising uptick to 242,000 for the week ending Dec 7, which exceeded the previous expectations of 220,000 and raised concerns about the labor market’s weakness. 

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Also today, the Bank of Japan is set to announce its interest-rate decision, with expectations leaning heavily towards maintaining rates at “around 0.25 percent”.  Alongside it, the Bank of England is set to deliver its interest-rate decision tomorrow, with markets widely anticipating no change. This steady stance is underpinned by persistently sticky inflation, as UK CPI for November rose to 2.6%, maintaining pressure on policymakers amid a fragile economic backdrop. Each of these points look set to mark the ECB as a global outlier, who are expected to continue their cutting program at a moderate clip.

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If this evening’s decision is a cut-and-dry 25bps cut, no one told crypto. Ahead of this evening's decision, BTC trades with caution. Spot is trading lower, retreating from the new all-time highs reached earlier in the week. After a leverage reset drove prices lower early last week, BTC funding rates have once again dipped negative – certainly a bearish indicator given that this is only the second time we’ve seen shorts pay the funding rates since early August.

The pullback in BTC spot has seen skews move towards neutral at short tenors, a move that appears to have been signaled earlier in the week. In fact, BTC’s volatility smiles started reducing their skew toward calls even as BTC rallied during the early hours of Monday morning. This adjustment in market positioning suggests traders may have anticipated the recent retracement, reflecting a more cautious outlook despite the earlier bullish momentum.

An analysis of BTC's volatility smile over recent days—Sunday night, Monday night, and this afternoon—reveals a consistent drop in skew, accompanied by a general decline in volatility levels. However, the most pronounced change came from an outsized drop in implied volatility of out-of-the-money (OTM) calls. This suggests that while traders weren’t aggressively hedging against a downside move by buying puts, they certainly weren’t buying the upside either. This reflects a cautious and balanced sentiment in the market.

As BTC’s spot pulls back today, so has XRP’s. Yesterday’s announcement of their stable coin RLUSD fueled an XRP rally yesterday to a high of $2.70, approximately a +12% (24hr) increase. However, prices across crypto today are experiencing a correction, with XRP fluctuating at the $2.50 mark (as of Dec 18, 2024).