Bitcoin extended its slide into the weekend as the most speculative asset continues to be hit the hardest while the excesses of the last few years get wrung from global markets. Fed policy and inflation dampened the outlook on cryptocurrencies.

The largest cryptocurrency by market value approached $40,000 for the first time since late September, bringing its losses, since a peak just three months ago, to about 42%. Ether, the second-largest digital asset, also declined, while popular Defi tokens such as Uniswap and Aave remained under pressure into the weekend. 

The volatilities come amid signs that the Federal Reserve is getting ready to combat persistent inflation through the withdrawal of stimulus. Minutes from the central bank’s December meeting, published Wednesday, flagged the chance of earlier and faster-than-expected rate hikes as well as a potential balance-sheet rundown. Those actions would remove liquidity from the system, which could dull the shine of high-growth and speculative assets. 

Bitcoin at near $40,000 is an important technical support level for the digital token. Cryptocurrencies are a good barometer for the current reduction in risk appetite.

For this week, Fed Chair, Jerome Powell, is likely to be pressed about what he intends to do to stem inflation when he appears on Tuesday before the Senate Banking Committee for a hearing on his nomination by President Joe Biden for another four-year term. Powell, a Republican, won favors from Biden and some other Democrats for his emphasis on the importance of the Fed achieving maximum employment that is broad-based and inclusive.

Data due on Wednesday will probably show that consumer prices rose 7% in December from a year earlier, according to the median forecast of economists surveyed. That would top November’s 6.8% annual raise and be the largest increase since 1982. Looking through the entire year, we expect inflation to remain elevated this year, with a mean forecast of 3.2% for the core personal consumption expenditures price index. That’s above the median 2.7% forecast of Fed policymakers at their 14-15 December meeting. 

Former Treasury Secretary, Lawrence H. Summers, says the Fed and policymakers are still underestimating what it is going to take to bring down inflation and doubts whether the three-quarter-percentage-point rate increases Fed policymakers have penciled in for this year will be enough.

Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to trade foreign exchange you should carefully consider your investment objectives, level of experience and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial advisor.

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