US Dollar’s Retreat Allows Cryptocurrencies to Climb
Following a short-lived dip below the key level at $20,000 Bitcoin is up 6.50% in the last 24 hours, and technical indicators foreshadow a stronger climb. The Fed’s war on inflation comes with higher interest rates which hurt risky assets such as cryptocurrencies but the divergence in policy between different central banks and the dynamics of fiat currencies also play an important role.
There’s a tight correlation between fiat and crypto and this means that when the US Dollar is going down, Bitcoin is going up, with altcoins following. This dynamic can be easily observed by comparing the US Dollar Index (DXY) and EUR/USD with BTC/USD. The last three days have been bearish for the DXY (weak US Dollar) but the same three days have been bullish for Bitcoin. This is called negative correlation – two assets move in opposite directions.
On the other hand, EUR/USD and BTC/USD are positively correlated, meaning they move in the same direction. The last three days have been bullish for both pairs, which makes sense considering that the DXY (which tracks the performance of the USD against 6 majors) has been going down.
The European Central Bank has just added 75 bps to the interest rate and ECB President Lagarde tweeted “If High Hikes Needed, We Will Do So”. This is likely to strengthen the Euro further, which will likely bring the DXY down (the Euro has the most weight among the 6 currencies in the DXY). If this becomes a reality, BTC/USD will climb due to the correlation discussed above. On top of this, two technical indicators are signaling that bullish moves are coming.
Technical Outlook – BTC/USD
The Relative Strength Index has bounced twice on its 20 level, which indicates oversold. While the RSI touched oversold and created a double bottom, the pair created a lower low – this is a case of regular bullish divergence, which indicates that a move up is coming.
The Bollinger Bands also support this bullish scenario: the price has bounced at the bottom band and the next destination could be the top band. The bounce at the lower Bollinger Band, the RSI bounce, and the divergence mentioned earlier are all factors that favor a move up.
If Bitcoin pushes further above $20K, the first target will be the 50-day Moving Average, which is very close to the upper Bollinger band and the bullish trend line that was recently broken. A new move below $20K will bring the pair closer to the June low at $17,592.