Last week, the European Central Bank announced a 25 basis point interest rate cut. Basically, the European monetary policy tightening cycle ended and the easing cycle began.

➤ Impact on the US dollar index

In the basket of currencies used to calculate the U.S. dollar index, the euro accounts for 57.6%, followed by the yen at 13.6% and the pound at 11.9%.

Needless to say, the Japanese yen is in a state of severe depreciation. The Bank of England is also expected to announce a rate cut this month.

This means that before the Fed cuts interest rates, the U.S. dollar index will most likely experience a phased rise.

Most of the time, BTC and the US dollar index fluctuate in the opposite direction.

Brother Feng used the price logarithms of the US dollar index, BTC and ETH to make a line chart. The coordinates of the US dollar index are on the right, and the coordinates of BTC and ETH are on the left.

It can be seen that, first, BTC and ETH fluctuate in the opposite direction of the US dollar index most of the time. Second, in the rising stage of the US dollar index, ETH's callback was more obvious in the first two times. The third time, but the last time, that is, this year, when the US dollar index rose, the callback amplitude of ETH and BTC was not much different. After all, ETH's ETF has entered the market expectation.

Summary: From the perspective of the US dollar index, the rise of the US dollar index is bearish for cryptocurrencies. However, BTC and ETH are affected by ETFs and have limited room for correction, but other altcoins may have a relatively significant decline.

➤ Impact on US stocks

The United States keeps interest rates unchanged and balance sheet reduction is still continuing, while Europe cuts interest rates, which may cause hot money to flow into the U.S. investment market and U.S. stocks may rise.

BTC and US stocks maintain a certain degree of synchronous fluctuation. However, hot money chasing US assets may be more interested in BTC ETFs in US stocks and US asset exchanges.

Summary: From the perspective of US stocks, Europe’s interest rate cuts may be good for BTC.

➤ Impact on the Fed’s rate cut decision

The appreciation of the US dollar and the depreciation of the euro are beneficial to US imports from Europe, but unfavorable to US exports.

In the short term, the depreciation of the US dollar is beneficial to imports, and the total amount of US imports from Europe is not low (about 10%). The decline in import prices will be conducive to a decline in the US inflation rate.

However, if the exchange rate of the US dollar against the euro continues to rise, the impact on export companies will also be relatively large, which will affect the US economy, employment, etc. (In fact, from the second half of 2023 to today, the US dollar index has generally risen, and the unemployment rate has also risen somewhat.)

Therefore, Europe’s interest rate cuts also put some pressure on the Federal Reserve.

Brother Feng adjusted the two charts of the Federal Reserve's federal funds rate and the European interest rate according to time and interest rate, and then overlapped them together.

The United States began raising interest rates in March 2022, while Europe began raising interest rates in July 2022.

In June 2024, Europe began to cut interest rates, so we should be optimistic. The possibility of the Federal Reserve cutting interest rates in September is not low.

Looking back at the dot plot in December 2023, there is a high probability (very low probability) that the rate will be cut three times in 2024, that is, the rate cut will start in September 2024. By March 2024, the interest rate forecast dot plot of Federal Reserve officials showed a high probability of predicting three rate cuts in 2024 (rate cuts in September).

Summary: The Fed may not have much time left to maintain high interest rates. Optimistically, it will announce a rate cut in September. Pessimistically, it is possible that the FOMC will announce a rate cut on November 5, the election day, or on November 8. The probability of a rate cut in December may be relatively low.

➤Written at the end

In the context of interest rate cuts in Europe, the US dollar index may have a negative impact on BTC, and US stocks may have a positive impact on BTC. These two factors combined, BTC may not have a very obvious trend. (Appendix: The probability of negative impact is higher. From January 21, 2018 to date, based on the weekly opening price, BTC has a 58% probability of fluctuating in the opposite direction of the US dollar index and a 51% probability of fluctuating in the same direction as the Nasdaq.)

ETH will be slightly weaker than BTC, but the probability that the altcoin may go down may be greater.

In addition, on June 13, the Federal Reserve is about to release a new dot plot. The Fed may be dovish or hawkish, and this attitude will affect market sentiment.

What is certain is that a slowdown in balance sheet reduction will be announced in June.

What is uncertain is that the forecast of a rate cut is still uncertain.

The focus is on when to stop shrinking the balance sheet. It is possible that the interest rate will be lowered at the same time as the balance sheet is stopped, or that the balance sheet is stopped first and then the interest rate is lowered. However, it is impossible to lower the interest rate earlier than stopping the balance sheet reduction.