Bitcoin’s inverse correlation with the US dollar hits 17-month highs – what’s next for BTC?

Bitcoin (BTC) has been moving in the opposite direction of the US dollar since the beginning of 2022 – and now the reverse is more extreme than ever.

Bitcoin and the dollar go in opposite directions

In particular, the weekly correlation coefficient between BTC and USD fell to 0.77 below zero in the week ending July 3, the lowest in seventeen months.

Meanwhile, Bitcoin’s correlation with the technology-heavy Nasdaq Composite reached 0.78 above zero in the same weekly session, data from TradingView shows.

This is primarily due to the performance of these markets so far this year amid fears of recession, led by the Federal Reserve reference rate increases to curb rising inflation. Bitcoin, for example, has lost over 60% in 2022, while Nasdaq’s return in the same period is around minus 29.72%.

On the other hand, the USD has excelled, with its US dollar index (DXY) – a calculation that measures strength against a basket of the best foreign currencies – hovering around its peaks in January 2003 of 105.78.

Will the dollar rise further?

The Fed appears to be forced to raise reference rates based on how traders have priced the front-end derivative contracts.

In particular, traders expect the Fed to raise interest rates by 75 basis points (bps) in July. They also bet that the Fed will not raise interest rates beyond 3.3% by the end of the year from the current 1.25% -1.5% range.

However, a pressure of 3.4% by the first quarter of 2023 could cause the central bank to reverse its aggressive tightening.

This could result in a cut of 50 basis points by the end of next year, as shown in the chart below.

An early rate cut could occur if inflation data cools, thus limiting investors’ appetite for the dollar, according to Wall Street analysts surveyed by JPMorgan. In particular, around 40% see the dollar end in 2022 at the current price level – around 105.

Meanwhile, a further 36% bet that the dollar would correct before the end of the year.

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

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

Will Bitcoin bottom out in 2022?

In addition, the dollar’s ability to continue the rally for the rest of 2022 may be hampered by a classic technical pattern.

First spotted by independent market analyst Agres, DXY’s double peak pattern is confirmed in part due to two consecutive highs and a common support level of 103.81.

As a rule for technical analysis, the double top pattern can resolve when the price breaks below the support and falls by as much as the maximum height of the structure, as shown in the diagram below.

As a result, DXY’s double top profit target comes close to 101.8, down over 3.25% from the price on 3 July.

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

“It simply came to our notice then [DXY] will roll down hard. In perfect confluence for a melting scenario. When [the] the dollar goes down, stocks and crypto-rally. “

Related: Bitcoin trader says you expect more notch, downside and then sideways price action for BTC this summer

Meanwhile, Bitcoin’s “MVRV-Z Score” has also fallen into a range that has historically preceded sharp, long-term upside traction. This chain indicator predicts that Bitcoin may bottom around $ 15,600 by 2022.

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