The price of Ethereum (ETH) has shown weakness after failing to break the $1,950 resistance on April 26. This led to a subsequent correction that drove ETH to $1,810 on May 1, nearing its lowest level in four weeks. Interestingly, this movement occurred while First Republic Bank (FRB) was seized by the California Department of Financial Protection and Innovation. The Federal Deposit Insurance Corporation (FDIC) entered into a purchase and assumption agreement with JPMorgan to protect FRB depositors, estimating a $13 billion loss.
Analyst Comments and Low Volatility
UBS analyst Erika Najarian commented on the latest major U.S. bank failure, stating that it does not change the rates, recession, and regulatory headwinds that regional banks are facing. The VIX indicator, which measures how traders are pricing the risks of extreme price oscillations for the S&P 500 index, reached its lowest level in 18 months on May 1. However, overconfidence is the main driver for surprise moves and large liquidations in derivatives markets, meaning low volatility does not necessarily precede periods of price stability.
Economic Environment and U.S. Debt
The economic environment has worsened significantly after the U.S. reported first-quarter gross domestic product (GDP) growth of 1.1%, below the 2% market consensus. Meanwhile, inflation in Germany remained exceptionally high at 7.6% year-over-year in April. Investors are now pricing higher odds of a global recession as the U.S. Federal Reserve is expected to raise interest rates above 5% on May 3. The U.S. Treasury is now targeting $1.4 trillion in new net borrowing between April and September 2023 as tax receipts have been running below expectations. If the U.S. debt level continues to increase while interest rates remain high, the government will be forced to increase debt payments, further pressuring its delicate fiscal situation.
Ethereum Derivatives Metrics
Ether quarterly futures are popular among whales and arbitrage desks and typically trade at a slight premium to spot markets. Futures contracts on healthy markets should trade at a 5% to 10% annualized premium, which is not unique to crypto markets. Since April 19, the Ether futures premium has been stuck near 2%, indicating that professional traders are unwilling to flip neutral despite ETH’s price testing $1,950 resistance on April 26. The 25% skew ratio is currently at 1 as protective put options are trading in line with the neutral-to-bullish calls. That’s a bullish indicator given the six-day 7.8% correction since ETH’s price failed to break the $1,950 resistance. Therefore, derivatives metrics show no sign of extreme fear or leveraged bearish bets, indicating low odds of retesting the $1,600 support in the near term.
Despite the major bank failure and economic concerns, Ethereum’s price has failed to display strength. However, derivatives metrics show no sign of extreme fear or leveraged bearish bets, indicating low odds of retesting the $1,600 support in the near term.
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