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

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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 the dollar go in opposite directions
Notably, the weekly correlation coefficient between bitcoin and the dollar fell to -0.77 in the week to July 3, its lowest level in seventeen months.

Meanwhile, bitcoin’s correlation with the tech-heavy Nasdaq Composite reached 0.78 above zero in the same weekly session, according to data from TradingView.

Correlation coefficient of BTC/USD and the US dollar. Source: TradingView
This is primarily due to these markets’ year-to-date performance amid recession fears, led by the Federal Reserve to raise interest rates to curb rising inflation. For example, Bitcoin lost more than 60% in 2022, while Nasdaq’s returns in the same period were minus 29.72%.

On the other hand, the US dollar stood out, with its US Dollar Index (DXY) – a measure of its strength against a basket of major foreign currencies – hovering around its January 2003 highs at 105.78.

BTC/USD vs DXY vs NDAQ weekly price chart. Source: TradingView
Will the dollar rise more?
The Fed appears to be compelled to raise interest rates based on how traders price the derivatives forward contracts.

Notably, traders expect the Fed to raise rates by 75 basis points in July. They are also betting that the Fed will not raise rates beyond 3.3% by the end of this year from the current range of 1.25%-1.5%.

However, a push to 3.4% by the first quarter of 2023 could lead the central bank to return to extreme tightening.

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

Changes in the Federal Reserve’s target interest rate. Source: TradingView
An early rate cut could occur if inflation data subsides, curbing investors’ appetite for the dollar, according to Wall Street analysts surveyed by JPMorgan. Notably, about 40% believe the dollar will expire in 2022 at its current price levels – around 105.

Meanwhile, another 36% are betting that the dollar will correct before the year closes.

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

“Personally, I tend to sell dollars at some point.”
Bitcoin to its lowest level in 2022?
In addition, the dollar’s ability to continue its appreciation for the rest of 2022 may be affected by the classic technical style.

DXY’s double top pattern was first spotted by independent market analyst Agres, and was partially confirmed by its two consecutive highs and a joint support level at 103.81.

As a rule of technical analysis, the double top pattern can unravel when the price breaks below the support level 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 higher profit target is approaching near 101.8, down more than 3.25% from the July 3 price.

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

“Finally, it looks like [DXY] is going to fall hard. In a perfect confluence of the melting scenario. When the dollar goes down, stocks and cryptocurrencies go up.”
Related: Bitcoin trader says he expects more chops, downside, and then sideways price action for BTC this summer

Meanwhile, Bitcoin’s MVRV-Z score has also slipped into a range that historically preceded a sharp and prolonged bullish bounce. This on-chain indicator predicts that Bitcoin could drop to around $15,600 in 2022.

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