Bitcoin no longer derives its strength from a weak dollar

The US Dollar Index (DXY), which tracks the value of the US currency against the major currencies, has come under pressure this week and may continue to decline in the near term.

While dollar reversals have historically been bullish for bitcoin, things could be different this time.

The reason for this expected difference is that the decline in DXY is likely to stem from the likes of the European Central Bank (ECB) after leading the Fed in fighting inflation by raising interest rates. Bitcoin, a liquidity-sensitive risk asset, may struggle to benefit from dollar weakness caused by currency traders buying the euro and other currencies amid the expected global tightening.

The previous bearish trend of the dollar dates back to 2020 and early 2021, which led to surges in risk assets, including bitcoin, as a result of the Federal Reserve printing trillions of dollars to protect the economy from the negative impact of the Corona virus pandemic. The Fed began shutting down the liquidity spigot early this year, and other central banks are now expected to follow suit.

According to a group of 48 economists polled by Reuters from May 10 to May 16, the European Central Bank is likely to raise its deposit rate in July and push it above zero by the end of September. The central bank deposit rate is currently -0.5%.

Yes, you read it correctly. In the past decade, interest rates across Europe and Japan have turned negative as central banks have struggled to stimulate the economy. From a layman’s perspective, a negative interest rate setting essentially means that the lender incurs a fee for lending the money. The abnormal phenomenon has sparked debate over whether the financial system is on the verge of collapse and has made the case for exploring alternatives such as cryptocurrencies. Therefore, an imminent reversal of negative rates could put pressure on the cryptocurrency markets.

European Central Bank Governing Council member Claes Knott said on Tuesday that he supports a quarter-point increase in July. Earlier this month, Knot colleague Isabel Schnabel said the central bank was “watching closely” the inflationary effects of a weaker euro. Andrea Michler, a member of the Swiss National Bank’s board of directors, said the strength of the Swiss franc helped stave off inflation. These comments suggest that policy makers around the world are considering retaliatory tightening to strengthen their currencies and keep a tab on inflation.

The EUR/USD pair is up about 1% this week, while the dollar index is down 0.7%. Despite weakness in DXY, Bitcoin is losing 4%.

Historically, major bitcoin price tops and bottoms have coincided with bullish/bearish reversals in the dollar index.

Bitcoin charted a 15-fold surge to over $60,000 in a year after the coronavirus-induced crash in March 2020. During that time, DXY collapsed more than 12% to 89.50. The reverse correlation resulted from the Fed’s unprecedented money printing. Other central bankers did the same, which led to an extraordinary risk appetite in the financial markets.

DXY could feel the pull of gravity again, but mainly due to retaliatory tightening by other central banks. Thus, the likelihood of Bitcoin taking cues from dollar weakness and charting a rally similar to the 2020-2021 period appears low.

From a technical analysis point of view, Bitcoin could see a comfortable rally if the bears once again fail to establish a foothold below the June 2021 low of $28,800. Sellers broke through the major support last Thursday but were unable to secure a weekly close (Sunday, UTC) below the support line.

The immediate resistance is at $31293 (weekly high), above which the cryptocurrency could revisit the 100-week simple moving average, which is currently at $36,650. Acceptance below $28,800 would expose the recent dips near $25,000.

Leave a Comment

Your email address will not be published.