Cryptocurrency prices staged a strong comeback in the overnight session as investors remained optimistic about the industry and the potential for a Federal Reserve intervention. Bitcoin price jumped to a high of $56,000, adding over 7000 points from its lowest point on Monday.

Ethereum rose to $2,525.while Stellar Lumens (XLM) price rose to $0.090, 20% above its lowest level on Monday. Aave rose to a high of $104.30, 35% above the lowest level on Monday while Ripple (XRP) soared to $0.50, 18% above Monday’s low. Other top-performing coins were Akash Network (AKT), Brett, Helium (HNT), and Ondo Finance.

To be clear: while these coins have bounced back, they remain in a bear market, which is defined as a situation where an asset drops by at least 20% from its highest point in a certain time.

Ripple’s XRP token has dropped by 22% from its highest level this month while XLM is 20% lower than the month-to-date high.

Global stocks are rebounding

The first reason for the crypto rebound is that global stocks have started bouncing back. In Japan, the Nikkei 225 and Topix indices rose by almost 10% after they plunged by over 14% on Monday.

In Hong Kong, the Hang Seng index rose by 20 basis points while the South Korean Kospi index jumped by over 4%. The same trend happened in India where the Nifty 50 index rose by 0.50%.

Most importantly US stock futures were also in the green, with the Dow Jones index rising by 320 points while those tied to the Nasdaq 100 and Russell 2000 indices rose by more than 1%.

This rebound happened as investors reflected on the recent events and bought the dip.

For starters, there were two main reasons for Monday’s crash. First, the drop happened after the US published discouraging economic data on Friday. The report showed that the unemployment rate rose to 4.3% in July as the economy created just 114,000 jobs.

Additional data revealed that wage growth slowed while the number of people filing for initial jobless claims rose sharply a week earlier.

Therefore, there are rising concerns that the US could go through a recession in the coming months.

Second, these assets tumbled as investors continued winding down their Japanese carry trade that has remained in place for decades. A carry trade is a situation where investors borrow cheaply and invest in high interest countries. The total carry trade is expected to be worth over $20 trillion. In a note, an analyst from CLSA said:

“While the market has rebounded a lot, the bigger picture uncertainty remains — whether the Bank of Japan can now raise rates again this year, and whether the Fed will cut.”

Why Stellar, AAVE, and Ripple are rising

There are a few reasons why the Stellar Lumens, AAVE, and Ripple are rising.

First, as I wrote on Monday, a US recession is actually a bullish catalyst for risky assets like cryptocurrencies and stocks because it will force the Federal Reserve to act.

Investors are already predicting several rate cuts this year. ING analysts see the Fed cutting rates by 0.50% in September followed by a series of 0.25% cuts later this year. They wrote:

“​​We can see the Fed acquiescing to some of the market worries and implementing at least one, perhaps two 50bp moves to get them on track to moving policy to a more neutral footing quickly. At the moment we are leaning in the direction of a 50bp in September followed by a series of 25bp moves.”

Jefferies analysts believe that the Fed will hold an emergency meeting in August and slash rates by either 0.25% or 0.50%. UBS analysts see 100bps rate cuts.

Therefore, as we saw in 2020, stocks and cryptocurrencies do well when the Fed is cutting interest rates. As we saw in 2022, they then tumble when the Fed is hiking.

Bitcoin price action

The other reason why the three coins are rising is that Bitcoin has bounced back. It rose to $56,000 on Tuesday and has formed two important chart patterns as shown above.

It has formed a hammer chart pattern, which is characterized by a long lower shadow and a small body without an upper shadow. It is one of the most popular reversal signs in the market.

Bitcoin also formed a falling broadening wedge pattern, which is another bullish pattern. In fact, as shown below, the coin formed a similar pattern in 2020 as the Covid-19 pandemic was starting.

Bitcoin’s bullish breakout will be confirmed if the coin rises above the 50-day moving average.

Altcoins like AAVE, Stellar Lumens, and Ripple have a close correlation with Bitcoin. For example, these coins rose to a multi-year high in March as Bitcoin jumped to a record high.

However, there is a big risk that this rebound could be part of a dead cat bounce, a situation where an asset in freefall stages a brief comeback and then resumes the downward trend. This brief rebound happens as some investors buy the dip.

The other risk is that Bitcoin remains below the 50-day and 100-day moving averages, meaning that bears are still in control for now.

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