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 this inverse relationship is more extreme than ever.

Bitcoin and dollar going in opposite directions

Notably, the weekly correlation coefficient between BTC and the dollar fell to 0.77 below zero for the week ending July 3, a seventeen-month low.

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/USD and US dollar correlation coefficient. Source: TradingView

This is mainly due to the year-to-date performance of these markets amid fears of recession led by the Federal Reserve’s benchmark rate hikes to curb rising inflation. For example, Bitcoin has lost over 60% in 2022, while the Nasdaq’s returns for the same period are around minus 29.72%.

The dollar, on the other hand, hovered around the January 2003 high of 105.78 on the US dollar index (DXY), a metric that measures its strength against a basket of top foreign currencies.

BTC/USD vs. DXY vs. NDAQ weekly price chart. Source: TradingView

Will the dollar go higher?

The Fed seems compelled to raise benchmark rates based on how traders are pricing their front-end derivatives contracts.

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

This could lead to a 50 basis point cut by the end of next year, as shown in the chart below.

Changes in the Fed’s interest rate target. Source: TradingView

According to Wall Street analysts polled by JPMorgan, an early rate cut could occur if inflation data cools, thereby curbing investors’ appetite for the dollar. Specifically, around 40% see the dollar expire in 2022 at current price levels – around 105.

Meanwhile, a 36% bet was placed on the dollar to recover before the end of the year.

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

“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 could be hampered by a classic technical pattern.

Firstly mottled According to independent market analyst Agres, DXY’s “double top” pattern has been 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 can be dissolved when the price drops below the support and falls by the maximum height of the structure as shown in the chart below.

DXY daily price chart. Source: TradingView

As a result, DXY’s double top profit target is approaching 101.8, down over 3.25% from today’s price.

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

“Finally, you look like [DXY] will be overturned violently. At the perfect confluence for a meltdown scenario. When? [the] dollar falls, stocks and crypto rally.”

Related: Bitcoin trader says he expects more cuts, downsides and then sideways price action for BTC this summer

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.

The views and opinions expressed here are those of the author alone and may not necessarily reflect those of Every investment and trading move involves risk, you should do your own research when making a decision.