The chart below shows the Daily on-balance volume (OBV) of the USD-index, which is a technical indicator that measures the strength of the USD. The big bullish pattern is seen on USD-index chart and also takes place on Bitcoin chart. Owing to the bullish pattern on USD-index chart, it is highly likely that the USD will rise further against BTC and this will result in a lower value of BTC.
U.S. Treasury bonds are the backbone of the US Dollar Index (USDX). The USDX is a market index that measures the performance of the U.S. dollar against a basket of currencies. It tracks the dollar’s value on the foreign exchange market. The USDX is typically the most widely used basket of currencies to measure the value of the U.S. dollar.Dollar traders are closely watching a potentially bullish head and shoulders pattern on the US Dollar Index (DXY). Meanwhile, the hint of a strengthening dollar weakens bitcoin’s (BTC) upside chances, especially as the leading cryptocurrency struggles to break out of its current trading range of $30,000 to $35,000.
Three troughs, one price ceiling
In particular, the inverse head and shoulders (IH&S) pattern forms after a downtrend. It contains three successive depressions, the middle one (head) being deeper than the other two (shoulders). Ideally, both shoulders should be the same height and width. All three declines are based on a price ceiling, known as the neckline, which acts as resistance.
The DXY, which measures the strength of the dollar against a basket of major foreign currencies, now confirms that it has formed an IH&S pattern.
The index now has the prospect of a bullish breakout after closing above neckline resistance. This involves setting a technical target at a distance equal to the price difference between the neckline and the bottom of the headline.
Inverse technical adjustment of the head and shoulders of the US Dollar Index. Source: TradingView
Bullish sentiment suggests that the DXY will rise by nearly 5% on a possible breakout of the neckline.
Meanwhile, the index’s 50-day simple moving average (50-day SMA; blue wave) is also waiting for a cross above the 200-day simple moving average (20-day SMA; saffron wave) to confirm the golden cross. Traders consider gold crosses to be bullish indicators.
The weakening of the dollar after March 2020 served as a headwind for risky assets and global growth, supported by the US Federal Reserve’s policy of quantitative easing to mitigate the economic impact of the coronavirus pandemic. The DXY ended 2020 with a loss of 6.83%.
However, in 2021, the dollar showed signs of recovery as the US economy rebounded strongly due to the acceleration of the coronavirus vaccination program. As markets reopened, demand for the dollar and dollar investments rose among global investors.
Brent Johnson, managing director of Santiago Capital, described the dollar as a Giffen asset, a type of asset whose demand increases with its price. He noted that despite the rise in inflation due to Fed money printing, global investors have increased their dollar-denominated debt, adding:
The continued issuance of USD denominated debt increases future demand for USD (debt repayable in USD) and, as noted above, does not reduce this demand when prices rise.
Kevin Kelly, senior financial analyst at Delphi Digital, said the net speculative positioning of DXY futures is no longer as bearish as it was in early 2021. He adds that this is very similar to the DXY’s positioning at the start of 2018, followed by a price recovery of around 10% over the next 18 months.
The recent rise in the DXY coincided with three consecutive monthly increases in inflation. According to the latest figures released by the Department of Labor on Tuesday, the consumer price index in the US rose 5.4 percent year-on-year, the highest 12-month rate since August 2008.
James Freeman, deputy editor of the Wall Street Journal, blamed the Fed’s money-pressing policies for the current inflationary pressures, noting that the dollars in each portfolio are actively losing value as a result. However, the Fed has assured that inflation is a temporary problem, which supports the rise in the DXY.
Fed Chairman Jerome Powell acknowledged Wednesday in his address to Congress that economic conditions do not currently allow them to scale back their quantitative easing program, including a $120 billion a month bond buying program. Powell did add that the Fed would give markets advance warning if it ever decided to reduce its purchases.
Combined with lower interest rates, the Fed’s expansionary policies have encouraged cheaper loans, leading to increased demand for assets such as real estate, technology stocks, gold and even bitcoin. At the same time, fears that rising inflation will prompt the central bank to cut interest rates have put pressure on apparently overvalued assets, which have lost some of their annual gains.
For example, bitcoin, which is often touted as a hedge against rising inflation, has fallen by more than 50% from its peak of $65,000. The decline is largely due to regulatory measures around the world, the exodus of China’s mining industry and other factors. But the Federal Open Market Committee’s mid-June decision to cut interest rates in 2023 is also likely to have added to the downward momentum.
Bitcoin went from $65,000 to $28,6,000 at one point. Source: TradingView
If the U.S. dollar reverses, that could chill some of this year’s most popular deals, Kelly said.
Commodities, gold, emerging market equities and bitcoin are all vulnerable to dollar strength, although dollar velocity also remains critical.
However, some analysts believe that the rising dollar poses no threat to bitcoin and think that investors will continue to allocate a portion of their portfolios to this emerging global asset.
For example, Katie Wood, founder and CEO of ARK Invest, told CNBC that bitcoin could gain a stronger foothold after overcoming concerns about China’s recent ban on cryptocurrency mining and its worrying carbon footprint, as Tesla CEO Elon Musk said in May.
An Intertrust survey of hedge fund CFOs from around the world also found that they will significantly increase their share of cryptocurrencies by 2026. 17% of those surveyed expect the share of bitcoin and similar digital assets to exceed 10%.
The views and opinions expressed herein are those of the author and do not necessarily reflect those of Cointelegraph.com. Every investment and every transaction involves risk. So do your own research before making a decision.
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