Three major events that will influence the market direction in 2026

The year 2025 has come to an end, and it can be said that the financial markets had a mix of joy and sorrow.

Thanks to the Federal Reserve's interest rate cuts and a significant rise in AI investment enthusiasm, global stock markets nearly achieved the largest annual gain in six years. Gold, silver, and platinum repeatedly hit historical highs, and traditional assets delivered an impressive performance.

However, the cryptocurrency market became the biggest loser in this feast. Bitcoin's closing price in 2025 was lower than at the beginning of the year, marking the first time in history that an annual decline occurred in the year following a halving event. Once regarded as "digital gold," Bitcoin fell behind in this round of asset class increases.

Disagreements about Bitcoin's long-term cyclical structure continue to widen. Some say the halving narrative has failed, and the four-year cycle has been broken; others believe this is just a temporary adjustment, and the real bull market is still ahead.

As 2026 begins, while wishing everyone a Happy New Year, the editor also wants to discuss several important monetary policy and political events in 2026 and see how they might impact the cryptocurrency industry.

Market Bets on the Fed Cutting Rates 3 Times

After the Federal Reserve held its last meeting of the year, the released interest rate forecast was quite conservative, suggesting that there might only be one rate cut in 2026, amounting to a 25 basis point reduction.

However, most institutions and economists do not share such a pessimistic view. Due to the political pressure from the midterm elections and changes in the Federal Reserve's personnel structure, they believe that the Fed's rate cuts in 2026 may exceed market expectations, with 2 to 3 cuts being more appropriate.

Major institutions like Goldman Sachs, Morgan Stanley, and Bank of America are essentially betting on 2 cuts, predicting that rates will drop from the current 3.50%-3.75% to around 3%-3.25%. Citigroup and China Galaxy Securities are a bit bolder, believing there will be 3 cuts, totaling 75 basis points.

Currently, the highest probability for the number of rate cuts in 2026 on Polymarket is 2 times.

There are also many analyses regarding the specific months for the rate cuts.

For those in power, low interest rates help stimulate the economy, thereby enhancing electoral chances. Therefore, to show the effects of policy before the midterm elections on November 26, 2026, the Trump administration needs the Federal Reserve to make significant rate cuts beforehand. Considering the lag in monetary policy transmission to the real economy, rate cuts need to be completed before October 28, 2026, making the December meeting too late for the elections.

Thus, major institutions' predictions for the timing of rate cuts in 2026 are mostly in the first half of the year.

For example, Nomura Securities predicts specific months as June and September; Goldman Sachs believes it will be March and June; Citigroup and Rabobank predict January, March, and September.

Currently, there is a strong consensus that a rate cut in June is likely, as the new Fed chair will preside over the FOMC meeting for the first time on June 17-18, 2026, and institutions are betting on a high probability of announcing a rate cut at this meeting to express loyalty to the White House.

Fed Resumes "Buy, Buy, Buy"

After discussing rate cuts, we must also talk about another important action taken by the Federal Reserve at its last meeting in 2025: the re-initiation of buying government bonds through a "Reserve Management Purchase" (RMP) mechanism.

Starting from December 12, 2025, the New York Fed will purchase approximately $40 billion in short-term Treasury bills each month. The official explanation is that this is a "technical operation," not considered monetary policy, merely to maintain "ample reserves" in the banking system and to prepare for the tax season in April next year, as money will flow from banks to the Treasury at that time.

The Fed's balance sheet is currently about $6.54 trillion, and if $40 billion is purchased monthly until April next year, it will add approximately $160 billion in assets.

In addition to the Fed buying government bonds, another data point worth noting is the Treasury General Account (TGA), which can be understood as the government's checking account at the Fed.

The last time the U.S. government shut down, the TGA balance reached a high of $959 billion, with a large amount of cash accumulated in the Treasury account.

TGA Balance Changes

It has been a month and a half since the U.S. government reopened, and the current TGA balance is about $850 billion. This means that $100 billion in spending has already been released, providing significant liquidity to the market.

For the cryptocurrency market, what matters is whether overall liquidity is increasing or decreasing.

So optimistically speaking, the combination of RMP purchases + significant TGA decrease + some form of tax rebate at the end of 2026 may provide a substantial boost to global liquidity, thereby helping the cryptocurrency market rise.

Why Does Japan Insist on Raising Rates?

After discussing the Fed, let's shift our focus to Japan across the Pacific.

The minutes from the Bank of Japan's December meeting show that policymakers are discussing the necessity of continuing to raise interest rates, with some members calling for "timely" action to control inflation. A Bloomberg survey indicates that economists believe the Bank of Japan will likely raise rates again in about six months, with most expecting this round of increases to ultimately stop at 1.25%. Former Bank of Japan executive Hideo Hayakawa even stated that rates could rise to 1.50% by early 2027.

While global markets are cutting rates, why does Japan insist on raising them?

This situation stems from Japan's circumstances. For decades, Japan has been battling deflation, with interest rates long near zero or even negative. But now the situation has changed; inflation has risen, and wages have started to increase, giving the Bank of Japan a chance to "normalize" monetary policy.

The problem is that Japan is burdened with a massive debt, with government debt accounting for about 200% of GDP. Japanese government bond yields have now fallen to levels not seen since before 2008. With such a high debt level, if rates rise too quickly, the government's interest payments will explode, and the bond market may not be able to withstand it.

Adding to the trouble is the yen. Before the meeting, the yen had already fallen to its weakest level in 10 months, nearing the 160 yen per dollar mark, a level at which the Japanese government directly intervened in the currency market last time. Logically, raising rates should strengthen the currency, but the yen has instead continued to decline.

The core contradiction lies here: the Japanese economy is in a dilemma: either save the bond market or save the yen, but both cannot be saved simultaneously. The Bank of Japan is saying it wants to raise rates to control inflation while also having to buy a large amount of Japanese government bonds to stabilize the bond market. Raising rates makes the yen more expensive, but simultaneously buying bonds injects liquidity, which is a bit like hitting oneself with the left hand while using the right hand.

Currently, Japanese government bond yields have fallen to levels not seen since before 2008, but the yen against the dollar is almost at a 35-year low. Therefore, it can be said that the Bank of Japan is actually "sacrificing the yen to save the bond market."

The negative impact of Japan's rate hikes on the cryptocurrency market is also directly observable; in the past few instances of rate hikes in Japan, the cryptocurrency market has experienced significant drops. The reasons have been discussed in previous articles such as "Why Does Japan's Rate Hike Cause Bitcoin to Crash?" and "From Yen Rate Hikes to Mine Closures, Why is Bitcoin Still Falling?". In simple terms, Wall Street and global speculators borrow yen at nearly 0% interest, convert it into dollars, and invest in high-yield assets like Bitcoin and U.S. stocks. It's like someone is lending you money for free to speculate on cryptocurrencies; would you be happy with an interest-free loan? This has resulted in trillions of dollars being borrowed.

When Japan suddenly raises rates, the cost of borrowing yen increases, and these institutions must close their positions, selling off risk assets, including Bitcoin, to repay the yen.

So will Japan's rate hikes in the new year repeat the previous downward trend? The editor believes it may not necessarily be the case for several reasons:

First, the market has already anticipated Japan's rate hikes. In the new year, rate hikes in Japan may not be as shocking, as the market has begun to pay attention to this influencing factor and has been discussing it for several months, with those needing to adjust their positions having already done so, unlike last year when it was unexpected.

Second, as mentioned earlier, the Fed is cutting rates on the other side. If the Fed does indeed cut rates 2-3 times in 2026, the interest rate differential between the U.S. and Japan will narrow, reducing the attractiveness of carry trades. A 0.25% increase in Japan may not have as significant an impact.

Third, the overall direction of liquidity is more important. As previously mentioned, with the Fed's leadership change, RMP purchasing government bonds, and the TGA account potentially continuing to release liquidity, along with possible tax rebates, no one wants to boost economic data more than Trump before the midterm elections. If the faucet in the U.S. is opened wide enough, the tightening effect in Japan may be largely offset.

Of course, short-term volatility will still occur. If the Bank of Japan suddenly accelerates the pace of rate hikes, or if the Fed's rate cuts are not as aggressive as expected, the market may still experience short-term panic. However, in the medium to long term, the overall trend of global liquidity will be the core variable determining the cryptocurrency market.

What If the Democrats Win the Midterm Elections?

After discussing monetary policy, there is actually another factor that directly impacts the cryptocurrency industry in 2026: the U.S. midterm elections in November.

Trump and his Treasury Secretary Mnuchin are well aware that to maintain the Republican Party's seats in Congress during the midterm elections, they must ensure that the American public feels tangible economic benefits before voting. This is why they are so eager to push for rate cuts and tax rebates, all aimed at stimulating the economy before the midterm elections.

Currently, the Democrats seem to have a comparative advantage. Recent local elections have given the Democrats a boost. They have won key elections such as the mayorship of New York City, the governorship of New Jersey, and the governorship of Virginia, even making breakthroughs in some traditionally red states.

For example, a conservative district in Georgia has unexpectedly turned blue, whereas Trump won there by a 12-point margin in last year's presidential election. The Miami mayoral election saw the Democrats win for the first time in 30 years. Even in deep red states like Tennessee, the Republicans only won by 8%, which would have been considered inadequate in the past without a margin of over 20%. The victories in local elections are not coincidental; they indicate that voters are dissatisfied with the current economic situation. If this trend continues into next year, the Republicans could indeed lose control of Congress.

Former House Speaker Pelosi recently expressed confidence in an interview, predicting that the Democrats will regain the House of Representatives in the 2026 midterm elections. There is a prevailing sense of optimism within the Democratic Party.

On the Republican side, however, there are numerous challenges:

Even if the Trump administration starts adjusting tariff policies and pushing for rate cuts, it will be difficult to see results in the short term. With the midterm elections set for November, and considering the time needed for policy transmission, Trump's window of opportunity is already very tight.

Trump has also been repeatedly calling for Senate Republicans to abolish the "filibuster" rule, which allows senators to delay or block a vote on a bill by continuously speaking. Trump wants to use this method to quickly advance his policies while also preventing the possibility of another "shutdown" on January 30 due to Democratic non-cooperation. However, there is significant opposition within the party, as many Republican senators are concerned that setting this precedent could lead to similar actions by the Democrats when they are the majority party in the future.

As 2026 begins, it is still too early to predict the outcome of the midterm elections, as there are too many variables. However, a few points can be confirmed: to maintain congressional seats, Trump will use all means available—rate cuts, fiscal stimulus, tax rebates—everything that can be done will be done, which will be beneficial for risk assets, including cryptocurrencies, in the short term.

Therefore, from an investment perspective, the editor believes that there may still be many operational opportunities and time windows in the first half of 2026. However, as the midterm elections approach in the second half of the year, uncertainty will sharply increase. If polls show the Democrats leading, the market may price in this expectation in advance, and the cryptocurrency industry may face adjustment pressure.