The negative correlation between Bitcoin and the US dollar hit a 17-month high. What's next for Bitcoin?
Bitcoin has been moving inversely with the U.S. dollar since early 2022—now more extreme than ever before.
Bitcoin and the dollar are moving in opposite directions
Notably, BTC’s weekly correlation with the U.S. dollar fell below zero to 0.77 in the week ending July 3, the lowest level in 17 months.
Meanwhile, Bitcoin’s correlation with the tech-heavy Nasdaq Composite hit a 0.78 above zero during the same week, according to TradingView.
Source of correlation coefficient between BTC/USD and US dollar: TradingView
That's largely because those markets have played out so far this year amid fears of a recession as the Federal Reserve raises its benchmark interest rate to stem rising inflation. For example, Bitcoin fell by more than 60% in 2022, while the Nasdaq returned about -29.72% in the same period.
The greenback, on the other hand, has outperformed, with the U.S. dollar index (DXY) - a measure of the greenback's strength against a basket of major foreign currencies - hovering around a January 2003 high of 105.78.
BTC/USD vs. DXY vs. NDAQ Weekly Price Chart Source: TradingView
Will the dollar appreciate further?
The Fed appears to have to raise its benchmark rate based on how traders price front-end derivatives contracts.
Notably, traders expect the Fed to hike rates by 75 basis points in July. They are also betting that the Fed will not raise interest rates above 3.3% by the end of the year from the current range of 1.25%-1.5%.
However, if the rate is raised to 3.4% in the first quarter of 2023, then the Fed may withdraw its aggressive tightening policy.
That could lead to a 50 basis point rate cut by the Fed by the end of next year, as the chart below shows.
Changes in Fed rate target Source: TradingView
Wall Street analysts surveyed by JPMorgan said a rate cut could be brought forward if inflation data cools, limiting investor appetite for the dollar. It is worth noting that about 40% believe that the US dollar index will end 2022 at its current price level - around 105.
Meanwhile, another 36% are betting the dollar will pull back before the end of the year.
"Forex is not a linear world. At some point, things will reverse," said Ugo Lancioni, global head of currencies at Neuberger Berman. He added:
"My personal preference is to be short the dollar at some point."
Will Bitcoin Bottom In 2022?
Additionally, the dollar's ability to continue rising through the remainder of 2022 could be hampered by a classic technical formation.
Independent market analyst Agres was first to spot the partial confirmation of the DXY's double top pattern thanks to its two consecutive highs and a common support at 103.81.
As a rule of technical analysis, a double top pattern can form when the price breaks below a support level and the decline reaches the maximum height of the structure, as shown in the chart below.
DXY Daily Chart Source: TradingView
Therefore, the double-top profit target for DXY is close to 101.8, which represents a decline of more than 3.25% from the July 3 price.
“The U.S. dollar is extremely overbought and overheated,” Agres explained, adding that its correction in the coming sessions could benefit stocks and cryptocurrencies:
"Finally, it looks like it (DXY) is going to take a big hit. A perfect confluence in a crash scenario. When the dollar falls, stocks and cryptocurrencies rise."
At the same time, Bitcoin's "MVRV-Z Score" is also stuck in the range before the historically significant long-term upward retracement. This on-chain metric predicts that Bitcoin’s 2022 price bottom could be around $15,600.