CME futures traders increase bitcoin short positions ahead of anticipated Fed rate decision volatility, analyst says

Chicago Mercantile Exchange (CME) bitcoin futures traders have ramped up short positions ahead of Wednesday's U.S. Federal Reserve interest rate announcement, signaling caution in the market, according to an analyst.

The Federal Open Market Committee (FOMC) is expected to announce its latest interest rate decision at 2 p.m. ET on Wednesday, with interest rate traders now predicting a 50 basis-point cut, the first reduction in the benchmark rate in four years.

K33 analyst David Zimmerman noted that CME traders have increased their short positions over the past two days. "CME active market participants have increased their exposure by 5,500 bitcoin in the past two days, while premiums hit a 9-month low, indicating a shift towards bitcoin shorts," Zimmerman explained.

The CME bitcoin futures market is signaling fears of possible heightened volatility, similar to what was observed after the recent U.S. Consumer Price Index (CPI) print. "Hedging FOMC risk may explain bitcoin’s downward sloping futures premiums on CME, which pushed below 5% for the first time since January 15," Zimmerman added.

The analyst observed that perpetual futures funding rates were rising while CME futures premiums were falling, describing this as "generally a negative short-term signal, and sets up the market to further amplify FOMC volatility."

Markets hold their breath ahead of FOMC meeting

Zimmerman acknowledged that while interest rate cuts have an easing effect with the potential for improved liquidity for risk assets, market participants continue to hold concerns over a potential economic slowdown. Nonetheless, the central bank may look to cut rates to get to the point where the cost of money is neither stimulative nor restrictive. 

"The size of the rate cut will be the first major signal, as 50 basis points may heighten concerns of a recession as they did in 2001 and 2007. However, real rates are currently at cycle highs. With inflation cooling and unemployment rising, the Fed may opt for swift cuts to reach a neutral rate. Currently, 125 basis points in cuts are expected by the end of the year," the K33 analyst said.

Interest rate traders have adjusted their expectations, now betting the Fed will announce a 50 basis-point cut at Wednesday's Federal Open Market Committee (FOMC) meeting rather than a more conservative 25 basis-point reduction. According to the CME FedWatch tool, the likelihood of a 50 basis-point cut has climbed to 65%, eclipsing the 35% probability for a 25 basis-point cut.

Scaramucci predicts bitcoin all-time high on Fed rate cut

SkyBridge Capital founder Anthony Scaramucci shared a more optimistic outlook for bitcoin, predicting that the combination of U.S. Federal Reserve rate cuts and favorable crypto regulations could drive the digital asset to new highs. Speaking with Bloomberg, Scaramucci forecasted that the Fed will cut interest rates by at least 150 basis points over the next 18 months.

"We are going to get pro-cryptocurrency, bitcoin, and stablecoin legislation in the first part of the next congressional term in the U.S.," Scaramucci said in his Bloomberg interview on Wednesday. "At the same time, you’re intersecting with rate cuts from the Federal Reserve, that’s going to be really good for asset prices in the U.S. and globally," he said, adding his prediction that bitcoin could hit $100,000 by the end of the year.

Bitcoin peaked at $73,798 in March, lifted by demand for dedicated US exchange-traded funds (ETFs). However, the rally was subsequently moderated as inflows into the ETFs cooled. In the past 24 hours, the bitcoin price has increased by around 1.5%, changing hands for around $59,960 at 7:54 a.m. ET, according to The Block's Price Page.