Ethereum, the world’s second-largest cryptocurrency, has been dragged down to its lowest levels since January 2021 by the selling tsunami that has ripped through global markets.
This crypto is already down 66% so far this year, having lost as much as three-quarters of its value (down 77.9%) from its all-time high set last November.
Why are cryptos plummeting?
The reason for the ongoing risk-off wave is clear.
Central banks are in a rush to raise interest rates to quell red-hot inflation not witnessed in decades. Last Friday, the US consumer price index unexpectedly came in hotter than expected at 8.6% in May – a 40-year high.
Generally, riskier assets shudder at the thought of interest rates going higher.
What more when central bankers are forced to trigger larger-than-usual rate hikes (larger than the customary 25-basis point adjustments at a time), preferring instead 50-bps or even 75-bps hikes at a single policy meeting, all in the name of holding back runaway consumer prices.
Such outsized hikes may do more damage to an economy than intended, potentially triggering a recession. With such fears at play, market participants have been scrambling to drastically reduce their exposure to risk assets, hence the selloffs across stocks, bonds, and cryptos.
In addition to fears surrounding the looming higher-rates environment, crypto sentiment has been further soured by news of withdrawal freezes and job cuts announced by major players in the sector.
Note also that such depressing news come hot on the heels of the stablecoins implosion for TerraUSD and Luna, which has compounded the dire outlook for cryptocurrencies.
Near-term events to look out for
If a 75-bps hike does materialize, coupled with a more aggressive tone out of the Fed this week, that could trigger the next leg down for cryptos.
Where to next for Ether?
Ether is now on the cusp of wiping out all of its gains garnered since the start of 2021.
From a technical perspective, Ether could be due for a rebound, with prices having plummeted into oversold conditions, as evidenced by its 14-day relative strength index falling into sub-30 territory.
Such a rebound may come by way of a Fed that can somehow allay market fears over its aggressive rate hikes and convince markets to look past the worrying headline inflation data - albeit it’s hard to imagine such an unlikely tone being adopted by the Fed.
Still, any relief may prove fleeting in the face of a Fed that’s hell-bent on combatting inflation.
As such, Ether could well break below its 200-week moving average, with bears sizing up the psychologically-important $1000 as the next area of interest. Below that, the $913 low of January 2021’s weekly long-legged doji (which typically signals market indecision) may offer stronger support.
Overall, Ether could well extend its declines, until risk appetite can find a more solid footing amid the looming recession risks ahead, all while contending with an increasingly aggressive Fed along with the uncertainty leading up to Ether’s “Merge”.