Why is the Fed's hawkish approach unsettling AUD/USD and Bitcoin?

How the Fed's decision impacts risk assets

The outcome of this morning's Federal Open Market Committee (FOMC) meeting has rattled key risk assets, including stocks, the AUD/USD, and Bitcoin, while causing the United States (US) dollar and US yields to surge higher.

The FOMC delivered a 25 basis point (bp) cut, as widely expected, which brought the Federal Reserve (Fed) Funds interest rate into a range of 4.25 – 4.50%. The Fed signalled a slower pace of easing in 2025, with the 2025 median dot showing just two 25 bp cuts compared to four previously forecast.

The Fed's revised projections were more hawkish than anticipated by most pundits. However, they aligned with pricing in the rates market leading up to the meeting, as noted in our Wall Street/FOMC article here earlier this week.

US dollar surge and global market reactions

Combined with the Fed's revised outlook, which included a lower unemployment rate and a higher forecast for gross domestic product (GDP) and core inflation, the rates market is now pricing in just 32 bp of rate cuts for 2025 (versus 50 bp yesterday). The next full rate cut by the Fed is not anticipated until September 2025.

Stepping back, this morning's Fed rate cut outcome should not have been too surprising following recent warm US inflation and activity data.

'Inflation has made progress towards the Committee's 2 percent objective but remains somewhat elevated.'

AUD/USD technical analysis

The AUD/USD hit its lowest level in two years this morning at 0.6199 as US yields and the surging US dollar reacted to the Fed's hawkish 25 bp rate cut.

The AUD/USD has dropped 10.7% in just over eleven weeks from its 30 September high of 0.6942, pushing the relative strength index (RSI) further into oversold territory.

After dropping through the trapdoor of the 0.6370 - 0.6335 support level and then below the 0.6270 low of October 2023, there is now little support until the 0.6170 low from October 2022 before facing the psychologically significant 0.6000 level.

To counter the mounting downside risks, the AUD/USD must promptly reclaim resistance in the 0.6350 - 0.6370 range on a sustained basis.

AUD/USD daily chart

Bitcoin technical analysis

Bitcoin also took a hit following this morning's hawkish Fed rate cut, falling to a low of $99,997 (-5.68%). The downturn occurred as risk sentiment weakened and US yields alongside the US dollar surged.

Yesterday morning, before the pullback commenced, we posted on X here, noting the bearish divergence evident on the RSI and the possible formation of a loss of momentum daily candle, which we indicated would increase 'the chances of a corrective pullback' from its $108,364 record high.

While a 7.67% pullback from a recent record high is a significant move in more traditional asset classes, it doesn’t substantially alter the trend in the high-octane world of Bitcoin. It's worth remembering Bitcoin has surged over 56% in the six weeks following the US election.

From a chart perspective, ideally, the overnight pullback would deepen into a band of support between $95,000 and $90,000 to work off further overbought readings and rebuild energy before another push higher in early 2025.

Bitcoin daily chart

• _{Source: TradingView. The figures stated are as of 19 December 2024. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation.}