ECB cut rates

Week by numbers

The last week has been bullish on the crypto market. The price of the largest cryptocurrency, bitcoin, rose by approximately five percent, the price of the second largest cryptocurrency, ether, by approximately three percent, and the total value of the rest of the crypto market by approximately six percent.

Taking a slightly longer-term view, the crypto market still seems to be in a sideways movement that started in mid-March, without a clear trend. However, after the price drop at the beginning of May, the price of bitcoin has made higher lows, which has raised hopes for the start of a new uptrend. In this respect, the peak of around $72,000 seen at the beginning of April is a key level. Getting over this level would significantly support the interpretation of this being a beginning of new uptrend.

As the crypto market moved relatively evenly upward during the last week, there were no significant changes in bitcoin dominance. With ether's weaker price movement, the ETH/BTC ratio, on the other hand, fell by about two percent.

In a slightly longer-term view, it can be seen that after the one-off jump with the ether ETF news, both the ETH/BTC ratio and the bitcoin dominance seem to have found a new equilibrium for time being. We believe that the next direction for both of these will largely be determined by the direction of token’s dollar prices, with a bearish market favoring bitcoin and a bullish one ether and smaller tokens.

Among the tokens in the Kvarn X trading selection, the best price development of the week was seen from Arweave's AR token (+13%), Sui-protocol’s SUI token and Gala Games' GALA token (+6%). The weakest tokens of the week were Chainlink's LINK (-5%), Algorand's ALGO (-3%) and The Graph protocol's GRT token (-2%).

Bitcoin relative to stock indices

With Bitcoin showing promising performance against the dollar, it might be a good time to start paying attention to its performance against other risky assets, such as technology stocks. Whereas the bitcoin rate against the dollar has made a sideways movement, a pessimist might see indications of a downward trend against stock indices.
Confidence in the new uptrend would increase if we saw bitcoin strengthen against the Nasdaq more clearly than it is now. While the dollar price of bitcoin is less than four percent away from its March peak, there is still about eight percent of the way to the top against the Nasdaq.

A situation in which the dollar-denominated price of bitcoin rises, but at the same time bitcoin is unable to strengthen against technology stocks, is not an ideal signal of the strength of the crypto market. The situation may very well turn around soon, but before the BTCUSD/NDX ratio gets above the level of 3.75 a couple of weeks ago, we are still cautious about the uptrend seen now.

In relation to the S&P 500 index, which describes the stock market more broadly, the situation looks pretty much the same.

The BTC/SPX ratio is currently about six percent below the BTC/SPX peak seen in March.

A situation where the SPX and NDX make new all-time highs, but Bitcoin does not, does not indicate a particular strength of the crypto market.

An optimist could see the silver lining of the situation in the fact that at least the crypto market does not seem clearly overvalued compared to the stock market, and thus there could be room for growth. We will follow the situation and return to the topic in future Kvarn Pulse newsletters!

EUR/USD continued to rise

In our Pulse newsletter last week, we discussed the relationship between the bitcoin exchange rate and the EUR/USD currency pair.

Briefly summarized, we found that Bitcoin has typically made its strongest upward movements when the currency pair EUR/USD is rising, in other words, when the dollar is weakening against the euro.

Last week, the EUR/USD exchange rate had just made a “lower low”, and because of this, we discussed a possible EUR/USD downtrend and its possible negative effects on the bitcoin exchange rate.

During the last week, however, we have seen that after this "lower low", EUR/USD did not continue to fall, but instead turned to a sharp rise. At the same time, we have seen bitcoin take a sharp step up.

The movements of the last week underscore that when the BCT/USD rate is in an uptrend, when the EUR/USD rate moves up, it has historically been a pretty good bet to guess that the BTC/USD rate will make relatively strong upward moves.
On the other hand, the last week reminds us that although EUR/USD often moves according to a clean trend, individual tops or bottoms that deviate from the trend should not be taken as sure signals, but only as first indications to start paying closer attention.

For now, the EUR/USD pair seems to be still in an uptrend, which is quite a favorable situation for cryptocurrencies. However, it is worth monitoring the development of the situation, because as can be seen from the previous peaks in e.g. December 2023 and March 2024, EUR/USD trend reversals can be quite sharp. The situation will be particularly interesting on Thursday, June 6. received the decision of the European Central Bank on the reduction of the key interest rate, which will be discussed further below.

ECB cuts rates

As expected, the European Central Bank announced on Thursday that it will lower its key interest rate. It was the ECB's first policy rate cut since 2019, and this decision can be seen as definitively ending the historic cycle of steep interest rate hikes, which was triggered by steep rise in inflation, triggered by the stimulus measures stemming from the corona pandemic.

In connection with the announcement of the reduction in the key interest rate, the central bank said at the same time that it would raise its inflation forecasts for 2024 from the previous 2.3 percent to 2.5 percent. Raising the inflation forecast, at the same time as lowering the key interest rate, illustrates well the pressures that the European Central Bank currently has to balance with.

The decrease in the policy rate was expected, and therefore did not cause large movements in the market. In the future, it will be interesting to monitor, in particular, what effect the different pace of the ECB's and the US central bank's interest rate cycle has on the EUR/USD ratio.

The ECB said it would proceed with possible next interest rate cuts one meeting at a time, and did not commit to a predetermined schedule. At the moment, the market seems to be pricing in one interest rate cut, which could be in September. September is also the time when the US Federal Reserve is expected to start its own interest rate cuts.

Earlier this week, the Bank of Canada announced its own interest rate cuts, becoming the first G7 country to cut its key interest rate. Before Canada, the central banks of Switzerland and Sweden had lowered their key interest rates in recent months.

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