Market experts expect the dollar rally to stop or correct by the end of 2022. Bitcoin (BTC) has been moving in the opposite direction of the US dollar since the beginning of 2022. But now this inverse relationship is more extreme than ever.
Bitcoin and dollar going in opposite directions
Notably, the weekly correlation coefficient between BTC and USD dropped to 0.77 below zero for the week ending July 3. This is the lowest level in 17 months. Meanwhile, Bitcoin’s correlation with the tech-heavy Nasdaq Composite hit 0.78 above zero in the same weekly session, according to TradingView data.
BTC vs US dollar correlation coefficient / Source: TradingViewcryptocoin.com As you follow, the Fed increased the benchmark interest rates to curb the rising inflation. These increases triggered recession fears. Among all these, the performance of these markets from year to year is the main reason for this.
For example, Bitcoin has lost over 60% in 2022, while the Nasdaq’s returns for the same period are around minus 29.72%. On the other hand, the USD came to the fore, hovering around the US dollar index (DXY) January 2003 high of 105.78.
BTC vs. DXY vs. NDAQ weekly price chart / Source: TradingViewWill the dollar go higher?
The Fed seems compelled to raise benchmark rates based on how traders are pricing their front-end derivatives contracts. In particular, traders expect the Fed to raise rates by 75 basis points (bps) in July. They are also betting that the Fed will not raise rates above 3.3% by the end of this year from the current 1.25%-1.5% range.
However, a push to 3.4% by the first quarter of 2023 is likely to cause the Fed to reverse its aggressive tightening. It is also likely to lead to a 50 basis point cut by the end of next year, as shown in the chart below.
Changes in Fed’s interest rate target / Source: TradingViewAccording to Wall Street analysts polled by JPMorgan, an early rate cut is possible if inflation data cools. Thus, the appetite of investors for the dollar is likely to be limited. Remarkably, around 40% predict the dollar will finish 2022 at current price levels (around 105).
Meanwhile, another 36% bet is that the dollar will correct before the close of the year. Ugo Lancioni, head of global currency at Neuberger Berman, said:
Currency is not a linear world. At some point, things turn around. I personally have a tendency to short the dollar at some point.
Will Bitcoin hit bottom in 2022?
In addition, the dollar’s ability to continue its rally for the rest of 2022 is likely to be hampered by a classical technical pattern. DXY’s double top pattern, first spotted by independent market analyst Agres, illustrates this. The pattern was partially confirmed due to its two back-to-back highs and a common support level of 103.81.
As a rule of thumb of technical analysis, the double top pattern is likely to dissolve once the price drops below the support and drops by the maximum height of the structure as shown in the chart below.
DXY daily price chart / Source: TradingViewAs a result, DXY’s double top profit target is approaching 101.8, down over 3.25% from the July 3 price. “The dollar was overbought and overheated,” Agres says. From this point of view, he adds that his correction in the coming sessions may benefit stocks and cryptocurrencies:
Eventually, looking like that (DXY) will be toppled hard. At the perfect confluence for a meltdown scenario. When the dollar falls, stocks and crypto rally begins.
Meanwhile, Bitcoin’s ‘MVRV-Z Score’ has also historically fallen into a range that precedes a sharp, long-term upward pullback. This on-chain indicator predicts that Bitcoin could drop around $15,600 in 2022.
