Ethereum price outlook weakens, but ETH derivatives suggest $1.6K is unlikely

Ether’s (ETH) price has shown weakness after failing to break above the $1,950 resistance on April 26. The subsequent correction drove ETH to $1,810 on May 1, nearing its lowest level in four weeks. Curiously, the movement happened 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.

Commented on the latest major U.S. bank failure, UBS analyst Erika Najarian stated:

“This deal does not change the rates, recession and regulatory headwinds that regional banks are facing.“

ETH price ignores banking crisis

Curiously, 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 at 15.6% on May 1.

It is worth noting that 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.

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.

According to macro analyst Lyn Alden, 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.

The U.S. Treasury updated their borrowing estimates.

They target over $1.4 trillion in net new borrowing during the two quarters from April through September 2023, with an ending cash balance target of $600 billion.

Tax receipts have been coming in below their expectations. pic.twitter.com/qnA6QFqx4m

— Lyn Alden (@LynAldenContact) May 1, 2023

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. Such a situation should be favorable for scarce assets, but what can Ethereum derivatives metrics tell us about professional traders’ risk appetite? Let’s take a look. 

Ethereum derivatives display modest confidence

Ether quarterly futures are popular among whales and arbitrage desks, and they typically trade at a slight premium to spot markets, indicating that sellers are asking for more money to delay settlement for a longer period.

As a result, futures contracts on healthy markets should trade at a 5% to 10% annualized premium — a situation known as contango — 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 absence of demand for leverage longs does not always imply a price decline. As a result, traders should investigate Ether’s options markets to learn how whales and market makers value the likelihood of future price movements.

Related: Venmo will enable fiat-to-crypto payments in May

The 25% delta skew indicates when market makers and arbitrage desks overcharge for upside or downside protection.

In bear markets, options traders increase their odds of a price drop, causing the skew indicator to rise above 8%. Bullish markets, on the other hand, tend to drive the skew metric below 8%, indicating that bearish put options are in less demand.

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.

So far, Ether’s price has failed to display strength, while the baking sector created a giant opportunity for decentralized financial systems to showcase their transparency and resilience versus traditional markets. On the other hand, 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.

This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.