Bitcoin (BTC) experienced a sharp 14% increase following the U.S. Federal Reserve’s 50 basis point interest rate cut nearly two weeks ago. However, this surge seemed poised for a correction, and the selection of Japan’s new prime minister over the weekend appeared to be the catalyst for a selloff. Japan’s ruling Liberal Democratic Party unexpectedly chose Shigeru Ishiba as the next prime minister. Ishiba is believed to favor the Bank of Japan’s (BOJ) move towards monetary policy normalization, including higher interest rates. Following his appointment, Ishiba called for snap elections in late October.

This political shift in Japan reignited concerns about monetary policy, particularly since the BOJ’s modest rate hike in July had previously triggered a major unwinding of the yen carry trade. This led to a global market panic and caused Bitcoin to drop sharply, from around $70,000 to below $50,000. The market turmoil forced the BOJ to intervene, with officials signaling no further rate hikes in 2024. Nonetheless, Ishiba’s selection over the weekend caused the yen to rise and Japan’s Nikkei stock average to fall by 5%, with Bitcoin declining by 5% as well. Bitcoin briefly dipped from around $66,000 to $63,300, before stabilizing at $63,800.

At the same time, European stocks fell by 1%, and U.S. stock futures showed minor losses. Before this, Bitcoin had been enjoying a strong bull run, aided by the Fed’s rate cut and China’s monetary and fiscal stimulus measures, which lifted the Shanghai Composite by 8%. CoinDesk analyst James Van Straten pointed out that several indicators, including perpetual funding rates for Bitcoin futures, signaled overbought conditions, similar to prior selloffs in July and August.

This week’s economic events, including U.S. manufacturing and service sector reports and Friday’s September jobs report, could significantly influence the Federal Reserve’s upcoming policy decisions. Markets currently anticipate a 25 basis point rate cut in November, although the Fed’s unexpected 50 basis point move in September was the driving force behind the recent Bitcoin rally. Any changes in these expectations could again affect Bitcoin’s price trajectory.

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