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Bitcoin’s inverse correlation with US dollar reaches a 17-month high

Published by
Nonhlanhla P Dube

Market analysts predict that the dollar rally will stagnate or reverse by the end of 2022, favouring Bitcoin.
Since the beginning of 2022, Bitcoin (BTC) has been heading in the opposite direction of the US dollar – and that inverse relationship is now more intense than ever.

Bitcoin and the dollar move in opposite directions

Notably, the weekly correlation coefficient between Bitcoin and the US dollar fell to 0.77 below zero in the week ending July 3, the lowest level in seventeen months.

Meanwhile, according to TradingView data, Bitcoin’s correlation with the tech-heavy Nasdaq Composite reached 0.78 above zero in the same weekly session. This is mostly due to these markets’ year-to-date performances amid recessionary fears, which have been fueled by the Federal Reserve’s benchmark rate hikes to combat growing inflation. Bitcoin, for example, has lost more than 60% in 2022, while Nasdaq has lost roughly 29.72 % in the same period.

The US dollar, on the other hand, has performed admirably, with the US dollar index (DXY) — a statistic that measures its strength against a basket of leading foreign currencies — lingering around its January 2003 highs of 105.78.

Will the dollar continue to rise?

Based on how traders priced front-end derivative contracts, the Fed appears obligated to raise benchmark rates.

Notably, traders expect the Fed to increase interest rates by 75 basis points (bps) in July. They also believe the Fed would not raise interest rates above 3.3 % by the end of the year, from the current 1.25 % -1.5 % range.

However, a rise to 3.4 % by the first quarter of 2023 may cause the Fed to ease off on its rapid tightening.

As illustrated in the chart below, this might result in a 50 basis point drop by the end of next year.
According to Wall Street economists polled by JPMorgan, an early rate decrease might occur if inflation data cools, restricting investors’ desire for the dollar. Notably, over 40% expect the dollar to end in 2022 at its current price levels — around 105.

Another 36% predicted that the dollar would fall by the end of the year.

“Foreign exchange is not a linear world. At some point, things flip,” noted Ugo Lancioni, head of global currency at Neuberger Berman, adding:

“I personally have a bias to short the dollar at some point.”

Bitcoin to hit rock bottom in 2022?

Furthermore, a traditional technical pattern may limit the dollar’s capacity to extend its surge for the rest of 2022.

The DXY’s double top pattern, first noticed by independent market analyst Agres, is partially corroborated by two consecutive highs and a common support level of 103.81.

As a general rule, the double top pattern will resolve when the price breaks below the support and falls by the maximum height of the structure.

As a result, DXY’s double-top profit target is near 101.8, down more than 3.25 % from the July 3 price.

“The dollar is extremely overbought and overheated,” explained Agres, adding that its correction in the coming sessions could benefit stocks and cryptocurrencies:

“Finally, looking like it [DXY] will topple down hard. In perfect confluence for a melt-up scenario. When [the] dollar goes down, stocks and crypto rally.”
Meanwhile, Bitcoin’s “MVRV-Z Score” has fallen into a region that has previously foreshadowed a sharp, long-term upside retracement. According to this on-chain indicator, Bitcoin might reach a low of 254K in 2022.

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Nonhlanhla P Dube

Nonhlanhla P Dube is a senior news reporter at Rateweb. Nonhlanhla is a student of International Relations at the University of South Africa. She reports primarily on personal finance and economics. You can contact her directly by email at nonhlanhla@rateweb.co.za

Published by
Nonhlanhla P Dube
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