Forecast: Effects of the Fed on Bitcoin

What effects will tomorrow’s Fed decision on interest rate cuts have on the price of Bitcoin?

Various forecasts are circulating on the matter, but they do not actually refer solely to the decision on cuts, which is already priced in by the market. Instead, they mainly concern the scenario that will be outlined tomorrow by the Fed.

It should be noted that the monetary policies of the Fed have a direct impact on the actual value of the US dollar (USD), and this inevitably also reflects on the price of Bitcoin in dollars (BTCUSD)

In particular, the effect of the monetary policies of the U.S. central bank is directly reflected on the Dollar Index (DXY), and in the medium term, these effects also impact BTCUSD, given that the price trend of Bitcoin in dollars tends to be inversely correlated with that of DXY over the medium term

The Fed’s Decision

The markets are now practically certain that tomorrow the Fed will cut interest rates by 25 basis points

This eventuality, highly probable, has already been largely priced in by the markets, but future decisions are not at all

In fact, the markets consider it likely that the Fed will no longer cut rates in January, and perhaps not even in March (in February 2026 there will be no monetary policy decisions)

Therefore, what will make the difference tomorrow will not be the expected decision to cut rates by 25 basis points, but what will be said both in the official press release and during the press conference regarding the potential evolution of interest rate policy throughout 2026

It is noteworthy that the Fed, after raising interest rates to as high as 5.5% during 2023, only began cutting them in September of last year

However, at the beginning of 2025, when they had dropped to 4.5%, they stopped cutting them due to a potential resurgence of inflation

This recovery then actually took place, starting in May, particularly due to the tariffs imposed by Donald Trump beginning in April

However, the Fed, despite inflation not yet decreasing, resumed cutting rates in September of this year, but they are still at 4%.

The Impact on the Dollar

The real value of a fiat currency like the dollar does not depend on the nominal value printed on the banknotes, but on its purchasing power

Inflation drives up the prices of consumer goods, thereby reducing the purchasing power of fiat currencies

For example, the US Consumer Price Index (USCPI) almost always shows an increase over the long term, indicating the nearly constant loss of purchasing power of the dollar

However, starting from 2021, the growth of the USCPI accelerated, rising in just a year and a half from 260 points to nearly 300 points. Consider that in the previous twelve years, it had increased from 210 points to 260

To all this are added the consequences of central banks’ monetary policies, because the more money is injected into the markets, the more its real value is diluted

Thus, more expansive monetary policies significantly decrease the purchasing power of fiat currencies, while more restrictive monetary policies cause a lesser decline

The Dollar Index

Specifically, the Dollar Index measures the change in the average exchange rate of the US dollar against a basket of other global currencies, primarily including the euro and the Japanese yen

In the medium term, USCPI does not vary much, therefore the fluctuation of DXY proves to be more significant. However, in the long term, DXY tends to oscillate more or less around the 100-point mark, whereas USCPI does little else but increase

Specifically, the trend of Bitcoin’s price in dollars over the medium/long term is correlated with the USCPI/DXY ratio. However, since USCPI changes little in the medium term and DXY varies significantly, over the months, the fluctuations in DXY have a greater impact on BTCUSD

Instead, over the years, the impact of USCPI prevails

What causes the most fluctuation in BTCUSD is indeed the Dollar Index, because the changes in USCPI are so slow and so small that they are only noticeable in the long term

The Fed’s monetary policies not only impact the USCPI but also the DXY, because if, for example, the purchasing power of the US dollar decreases more than that of the euro in a given period, the Dollar Index will tend to rise

The Fed’s rate cut should lower the Dollar Index, as it would also reduce the yield on U.S. government bonds, prompting several holders to sell them.

If foreign holders sell them, they will obtain USD from the sale, which they will then sell to acquire local currency. This increases the selling pressure of USD on the foreign exchange market, causing both the U.S. selling value and consequently the Dollar Index to decrease

Bitcoin Forecasts

To be honest, in the last two months, the trend of Bitcoin’s price has decreased more than the Dollar Index has increased, proportionally

In fact, since the beginning of October, DXY first rose from below 98 points to over 100 points, and then in recent weeks, it fell to 99 points

Although these are not insignificant movements for an index like this, they pale in comparison to Bitcoin’s volatility

In fact, BTCUSD since the end of September first rose from $110,000 to $126,000, then fell to $80,000, and then climbed back up to $90,000

However, although the proportions of these movements are different, the direction is very similar

Regarding the Dollar Index, the circulating hypothesis is that it might decline further, given that not only might the Fed cut rates tomorrow, but also because the Bank of Japan is expected to raise them next week

Therefore, starting particularly from the week of Christmas, several Japanese investors might sell U.S. government bonds to purchase Japanese government bonds, as the former will yield slightly less, and the latter slightly more

It should be noted that Japan is currently the foreign state holding the most US government bonds, therefore this is by no means an insignificant dynamic concerning the DXY

In fact, the Japanese who sell US bonds to buy Japanese bonds will receive USD from the sale, and will then have to sell them to purchase yen for the final transaction

All this should lead to a decline in the Dollar Index, which could favor a rise in the price of Bitcoin, especially over the coming months

Although there is no certainty that this will indeed happen, such a scenario should at least be considered plausible as of today.