Bitcoin rallies thwarted by fading Fed rate cut odds, softening US macro

Key takeaways:

• Strong demand for US Treasurys and lower odds of a Fed rate cut indicate that investors are shifting toward safer assets, reducing interest in Bitcoin.

• Economic weakness in Japan and softer US job data add pressure to Bitcoin, limiting its use as a hedge in the near term.

Bitcoin (BTC) has repeatedly failed to hold above the $92,000 level over the past month, prompting market participants to develop multiple explanations for the price weakness. While some traders point to outright market manipulation, others attribute the decline to rising concerns around the artificial intelligence sector, despite the absence of concrete evidence to support these claims.

The S&P 500 traded just 1.3% below its all-time high on Friday, while Bitcoin remains 30% below the $126,200 level reached in October. This divergence reflects increased risk aversion among traders and undermines the narrative that fears of an AI bubble are driving broader market weakness. 

Regardless of Bitcoin’s decentralized nature and long-term appeal, gold has emerged as the preferred hedge amid ongoing economic uncertainty.

Fed balance sheet reduction drains liquidity, capping Bitcoin near $90K

One factor limiting Bitcoin’s ability to break above $90,000 has been the US Federal Reserve reducing its balance sheet through most of 2025, a strategy aimed at draining liquidity from financial markets. That trend, however, reversed in December as the job market showed signs of deterioration and weaker consumer data raised concerns about future economic growth.

Retailer Target cut its fourth-quarter earnings outlook on Dec. 9, while Macy’s warned on Dec. 10 that inflation would pressure margins during year-end sales. More recently, on Dec. 18, Nike reported a drop in quarterly sales, sending its shares down 10% on Friday. Historically, reduced consumer spending creates a bearish environment for assets perceived as higher risk.

Despite clear signals of a shift toward a less restrictive monetary stance, traders are increasingly uncertain about the US Fed’s ability to cut interest rates below 3.5% in 2026. Part of this uncertainty stems from a 43-day US government funding shutdown, which disrupted the release of November employment and inflation data and further clouded the economic outlook.

The odds of an interest rate cut at the FOMC meeting on Jan. 28 fell to 22% on Friday from 24% the prior week, according to the CME FedWatch Tool. More importantly, demand for US Treasurys remained firm, with the 10-year yield holding at 4.15% on Friday after briefly approaching levels below 4% in late November. This behavior signals growing risk aversion among traders, contributing to weaker demand for Bitcoin.

Bitcoin’s correlation with traditional markets has been declining, but this does not imply that cryptocurrency investors are insulated from softer economic conditions. Weak demand for Japanese government debt has increased contagion risks, as the country faces 10-year bond yields above 2% for the first time since 1999.

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Japan holds the world’s fourth-largest Gross Domestic Product, and its local currency, the yen, has a $4.13 trillion monetary base. The country’s 2.3% annualized GDP contraction in the third quarter is notable, given that Japan has maintained negative interest rates for more than a decade and relied on currency depreciation to stimulate economic activity.

Bitcoin’s struggle near the $90,000 level reflects uncertainty around global growth and weaker US labor market data. As investors become more risk-averse, the positive impact of lower interest rates and stimulus on risk-on assets diminishes. As a result, even if inflation reaccelerates, Bitcoin is unlikely to serve as an alternative hedge in the near term.

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