Ethereum price hits $1.6K as markets expect the Fed to ease the pressure

Between October 25th and 26th, there was a surprise increase of $250, pushing the price of Ether (ETH) from $1,345 to $1,595. The move saw the liquidation of $570 million in Ether bear bets on derivatives exchanges, the largest event in more than 12 months. The price of Ether also rose above the $1,600 level, which was the highest price since September 15th.

Let’s examine whether this 27% rally over the past 10 days reflects any signs of a trend change.

4 hour Ether/USD price index. Source: TradingView

It is worth noting that three days later on October 29th there was another 10.3% increase towards $1,650, triggering another $270 million liquidation of short sellers on ETH futures contracts. In total, $840 million worth of leverage was liquidated in three days, representing over 9% of the total open interest in ETH futures.

On October 21, the market turned bullish after San Francisco Federal Reserve President Mary Daly mentioned intentions to reduce the pace of interest rate hikes. However, previous US central bank tightening has led the S&P 500 stock market index to contract 19% in 2022.

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Despite the 5.5% stock market rally between October 20 and 31, ING analysts noted on October 28 that “we do expect the Fed to open the door to a slower pace through formal guidance, but not necessarily to go through with it.” The ING report further added : “It could be that we get a final 50bp in February, which would then mark the peak. That would leave the final rate at 4.75% to 5%.”

Considering the conflicting signals from mainstream markets, let’s take a look at Ether derivatives data to understand if investors are supportive of the recent price increase.

Futures traders remained bearish despite the $1,600 rally

Retail traders typically avoid quarterly futures due to their price differential from spot markets. Nevertheless, they are the preferred instruments of professional traders because they avoid the fluctuations in funding rates that often occur with perpetual futures contracts.

Ether 3-month futures annual premium. Source: Laevitas

The index should trade at an annual premium of 4 to 8% in healthy markets to cover costs and associated risks. So the chart above clearly shows the dominance of bearish bets on ETH futures as its premium was in negative territory in October. Such a situation is unusual and typical of bear markets, reflecting the reluctance of professional traders to add leveraged long (bull) positions.

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Traders should also analyze Ether options markets to rule out externalities specific to the futures instrument.

ETH options traders moved into a neutral position

A 25% delta skew is a telltale sign of when market makers and arbitrage tables are overbidding for upside or downside protection.

Ether 60 day options 25% delta skew: Source: Laevitas

In bear markets, option investors place higher odds on a price decline, which causes the bias indicator to rise above 10%. On the other hand, bull markets tend to push the skewness indicator below -10%, which means bearish put options are discounted.

The 60-day delta was above the 10% threshold until October 25, and signal options traders were less inclined to offer downside protection. However, a significant change occurred in the following days as whales and arbitrage desks began to appreciate the balanced risk of downward and upward price swings.

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Liquidations show surprising movement but minimal buyer confidence

These two derivative metrics suggest that the 27% increase in Ether prices from October 21st to October 31st was not expected, which explains the huge impact on liquidations. By comparison, Ether’s 25% rise from August 4th to August 14th resulted in $480 million worth of leveraged short liquidations (sellers), down roughly 40%.

Currently, the prevailing sentiment is neutral according to the ETH options and futures markets. Traders are therefore likely to tread carefully, especially as the whales and arbitrage desks stood aside during such an impressive rally.

Until the strength of the $1,500 support level is confirmed and the increased appetite of professional traders for leveraged longs, investors should not jump to the conclusion that Ether’s rally is sustainable.