The Fed is about to cut interest rates in September: Why might crypto not be as bullish as expected?

Recently, news about the crypto market shows that traders are excited about the possibility that the Federal Reserve (Fed) will lower interest rates in September. Typically, lower policy interest rates create favorable conditions for risk markets. However, this time things are not that simple.

Government bond yields are still rising. Other regions around the world may not cut at the same time. Meanwhile, gold is attracting capital seeking a safe haven. All these factors combined could continue to put pressure on the cryptocurrency market.

Yield increases even when interest rates fall

The yield on 30-year U.S. Treasury bonds is currently around 4.98%. In the United Kingdom, this figure is approximately 5.69%. Meanwhile, the yield in France is about 4.5%, while Germany is around 3.4%. Compared to previous years, these are all high yield levels.

When yields rise, investors gain additional income from bonds. The safe returns from government debt become more attractive compared to riskier investments like cryptocurrencies. This makes digital assets struggle to attract new capital.

Yield also affects how investors value future returns through a concept called "discount rate." The higher the discount rate, the lower the value of future returns. With cryptocurrencies already viewed as a risky and long-term investment, their appeal diminishes as yields increase.

In addition, borrowing costs also increase with yields, which is especially important for traders using leverage. Higher costs make it difficult for them to maintain leveraged Long positions on Bitcoin or Ethereum.

The result is that some traders are forced to withdraw, reducing demand. All of this contributes to maintaining a "risk-off" sentiment in the market. Simply put, investors will avoid risky assets when they can earn safe profits elsewhere.

Global conditions make the crypto market cautious

Even if the Fed cuts interest rates, Europe may not follow suit immediately. Inflation in the region remains high, meaning the European Central Bank (ECB) may hesitate before easing policy. If Europe continues to maintain high borrowing costs, global yields will find it difficult to decrease.

For the crypto market, this is an important factor as capital flows always move across borders. Investors will compare returns on a global scale. If bond yields in Europe remain strong while the Fed cuts, international capital will still prioritize safe assets. This weakens the potential for a major bull run in crypto.

In a different development, America is issuing a large amount of new bonds. Investors are demanding higher yields to buy in. This creates a "term premium" (term premium), causing long-term interest rates to rise even as short-term rates are cut. In fact, this weakens the impact of the rate cut move from the Fed.

Liquidity, therefore, has not improved as traders expected. This is a conflicting signal: the Fed lowers interest rates, but the pressure from high long-term yields remains. For the crypto market, this means less momentum for significant rallies and a higher likelihood of sideways or downward trends.

Gold hits a peak while the market waits

Recently, gold has continuously reached new highs, indicating that investors are seeking safety. Typically, in a clearly "risk-on" environment, part of this capital flow may move into Bitcoin or Ethereum. However, at present, gold is attracting capital.

Source: The Kobeissi Letter/XSo, what does this mean? It shows that investors still do not truly believe that the Fed's rate cuts have been sufficient to make the global picture safer.

If they trust, more capital flows will be willing to take risks and move into the cryptocurrency market. But instead, they choose to move to the oldest traditional safe-haven asset – gold.

Source: The Kobeissi Letter/XUntil long-term yields cool down and inflation shows signs of easing, the "risk-off" sentiment will persist. The crypto market may therefore not see the significant boost that traders are hoping for after the Fed cuts interest rates. In particular, the picture for September is leaning more towards a bearish scenario.

Bitcoin and Ethereum ETF funds can serve as a certain support for the market, but the influx of capital is still expected to maintain caution. In the event that yields cool down and the USD weakens in the near future, demand for digital assets may increase significantly.

However, at the current time, expectations for the Fed to cut interest rates in September are taking on more of a warning than a signal for a breakout.

Justin