Bitcoin (BTC) has rallied nearly 60% to around $27,000 in 2023 amid anticipations that the Federal Reserve would pause its quantitative tightening amid the U.S. banking crisis. Still, BTC price has failed to move beyond $30,000 decisively.
Buying exhaustion at this key psychological level led to a price correction toward $25,000 over the past week. Interestingly, the decline has strengthened Bitcoin’s correlation with several traditional financial metrics.
But does this raise the risk of Bitcoin continuing its downtrend in Q2? Let’s have a closer look.
U.S. dollar index’s double bottom
The U.S. dollar index (DXY), which measures the greenback’s strength against a basket of top foreign currencies, rose 1.4% to 102.70 in the week ending May 14. The rise marked the dollar’s best week since September 2022.
Interestingly, the dollar’s rise left behind a potential double bottom pattern, confirmed by two low points near a similar horizontal price level of around 100.75. A double bottom pattern is a bullish reversal setup, suggesting DXY could rise toward 105.85 in the next few months.
DXY’s weekly relative strength index (RSI), which has undergone a rebound after reaching 35 — just five points above the oversold threshold — further hints at bullish continuation, which is typically a bad omen for Bitcoin’s price.
The main reason is the strengthening negative weekly correlation between Bitcoin and DXY, with the coefficient around -50 as of May 14.
Earlier in the week, the latest U.S. consumer price index (CPI) report showed headline inflation dropped to 4.9% in April versus the previous month’s 5%. However, core inflation was up 5.5%, suggesting underlying price pressures remain sticky, which for now has cooled down Fed rate cut expectations.
John Authers from Bloomberg writes:
“The odds of a ‘pause’ in interest rate hikes next month have now risen to virtual certainty in futures and swaps markets, having been seen as an 84% chance before the numbers came out.”
A Fed pause should result in a stabilizing bond market. History indicates that stable interest rates have been good for U.S. Treasuries but bad for stocks, with Erin Browne and Emmanuel Sharef of Pimco saying:
“If the Fed pauses at its peak rate for at least six months and the U.S. slides into recession, then history suggests 12-month returns following the final rate hike could be flat for 10-year U.S. Treasuries, while the S&P 500 could sell off…
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