Bitcoin (BTC), which is the largest cryptocurrency in the world by market capitalization and closely follows U.S. Dollar liquidity metrics, has experienced a surge this year. The price of BTC has risen 70% since January 1.

Some observers believe that the rally could hit a temporary snag if Federal Reserve Chairman Jerome Powell fails to signal the much-anticipated pause in the tightening cycles on Wednesday.

The Fed will announce the latest interest rate decision at 2 pm on Wednesday. ET (18:00 UTC). Powell will then speak for half an hour at the press conference that follows. The CME FedWatch Tool shows that traders expect the central banks to raise rates by 25 basis points, to the range of 5% to 5.25%. This will end the so-called Tightening Cycle which roiled cryptocurrency last year. Further, traders have begun pricing in rate cuts beginning in July.

Multiple uncertainties, such as the Debt Ceiling, Fears of Recession and Crisis at Regional Banks, have recently increased the dovish outlook.

Powell must confirm that pauses and rate cuts are still on the table during his presser. Otherwise, Treasury yields may rise and the U.S. Dollar (USD) could bounce. A rise in the dollar and yields has historically negatively affected bitcoin.

“As markets are expecting a pause following this hike, we will be looking for the sentence ‘additional policies firming could be appropriate’ being removed from the statement and replaced with more open-ended terminology leaving the door wide open for more rate hikes, or a pause (i.e. data-dependency),” Dick Lo, founder and CEO at quant-driven crypto-trading firm TDX Strategies told CoinDesk.

Lo said, “We expect Chair Powell to be cautious about being definitive in a pause that could disappoint the market.”

Since October 2022 the markets have been in a classic risk on mode, anticipating a Fed pivot to the dovish side. Since early October, the dollar index, which measures the value of the greenback against major fiat currency, has fallen by more than 14%. The Nasdaq, a tech-heavy index on Wall Street, and bitcoin both rose by 25% and 50% during the same time period.

Lo has warned that the markets may be disappointed by Powell’s lack of conviction in announcing the pivot, which could trigger a recovery for the greenback.

Chris Weston of Pepperstone’s research department, who is also the head of foreign exchange brokerage, expressed a similar view on twitter.

Weston stated that “sure, bank equity was hit, but since nothing had been priced for June, and the cuts began in July, the Fed feels the risk is skewed to the hawkish end if it offers a lazy tightening policy (data dependent).

The Fed is expected to cut rates in July. (Pepperstone/Fed Funds Futures)

Weston noted that the pre-Fed pricing was similar to what we saw before the Reserve Bank of Australia made its recent rate decision. RBA raised rates on Monday by 25 basis points, and warned that more tightening was coming. This contradicted expectations of a continuation of a pause in interest rates and eventual easing this year. The surprise rate hike prompted the Aussie Dollar to surge.

Weston believes that any post-meeting rise in yields or the dollar will be temporary and could worsen the banking sector’s woes. Bitcoin’s performance has been positive during recent banking turmoil , increasing its appeal as a safe haven.

“I would expect this initial move [higher USD] to be short lived as any decent spike of bond yields will see bank equity taking another leg lower. Traders will simply reapply USD, crude shorts, and buy JPY and gold as a hedge,” Weston pointed out.

Despite what Powell may say at the press conference following the meeting, some observers do not expect a sustained dollar rise.

The U.S. Dollar is unlikely to rise here, as expectations of an eventual dovish Fed pivot will be maintained – regardless if the Fed raises again or signals a second hike,” Markus Thielen said, head for research and strategy at Matrixport.

“The banking sector has been under stress due to deflation and the energy prices have dropped significantly. Fed also sees progress with their request for an increased unemployment rate, which should give comfort that rate increases are ending. Bitcoin will likely rally on a pivot to the dovish side,” Thielen said.

Parikshit Miishra is the editor.