Bitcoin (BTC) is up nearly 60% to around $27,000 in 2023 on expectations that the Federal Reserve will halt its quantitative tightening amid the US banking crisis. However, the Bitcoin price failed to decisively surpass $30,000.
Exhaustion of buying at this key psychological level led to a price correction towards $25,000 over the past week. Interestingly, the decline has strengthened Bitcoin’s correlation with several traditional financial metrics.
But does this increase the risk of Bitcoin continuing its downtrend in the second quarter? Let’s take a closer look.
The double bottom of the US dollar index
The US Dollar Index (DXY), which measures the greenback’s strength against a basket of major foreign currencies, rose 1.4% to 102.70 in the week ending May 14. The rise was the best week for the dollar since September 2022.
Interestingly, the rise in the dollar left behind a potential double bottom pattern, which was confirmed by two low points near a similar horizontal price level around 100.75. The double bottom pattern is a bullish reversal formation, which indicates that DXY may rise towards 105.85 in the next few months.
The weekly relative strength index (RSI) for DXY, which has seen a rebound after reaching 35 — just five points above the oversold threshold — also hints at a continuation of the bullish trend, which is usually a bad omen for the bitcoin price.
The main reason is the consolidation of the negative weekly correlation between Bitcoin and DXY, with coefficients around -50 as of May 14th.
Earlier in the week, the latest US Consumer Price Index (CPI) report showed that headline inflation fell to 4.9% in April from 5% the previous month. However, core inflation rose by 5.5%, indicating that core price pressures are still holding, which for the time being has tempered expectations of a Fed rate cut.
John Authers wrote for Bloomberg:
“The odds of a ‘pause’ in a rate hike next month have now risen to virtual certainty in the futures and swaps markets, having been seen as an 84% chance before the figures came out.”
The Fed pause should stabilize the bond market. History suggests that stable interest rates have been good for US Treasuries but bad for equities, as Erin Brown and Emmanuel Scherff of Pimco said:
“If the Fed stalls at its peak for at least six months and the US slips into recession, then history suggests yields 12 months after the final rate hike could be flat for the 10-year US Treasury, while the S&P 500 could That sells sharply.”
Thus, the risk appetite will be a boon for the dollar, with an increased risk of Bitcoin failing to reclaim $30,000 in the short term.
The price of gold is near the major reversal point
The price of gold rose about 15% to more than $2,000 an ounce amid the banking crisis. The positive correlation with Bitcoin has also grown with its weekly coefficient reading of 0.82 as of May 14th.
But gold’s rally brought its price to an infamous horizontal resistance level near $2075. In March 2022, this level was instrumental in triggering a sharp bearish reversal phase that sent gold down as much as 22%.
Likewise, a test of the level as resistance in August 2020 preceded a price drop of 18%. If the scenario is repeated in 2023, gold price could decline towards the 50-week exponential moving average (50-week exponential moving average; red wave) near $1,850.
Gold’s weekly RSI, which is hovering around an overbought reading of 70, suggests a similar bearish scenario. As a result of the positive correlation between the precious metal and Bitcoin, the latter may see a similar correction in the second quarter.
M2 money supply decreases
M2 measures cash in circulation plus dollars in bank and money market accounts. The M2 figure rose more than 40% during the Covid-19 pandemic due to the Fed’s quantitative easing, reaching a peak of $21.84 trillion in January 2022.
It has since fallen to $20.81 trillion, down more than 4% from the peak, in May 2023.
A 2% drop in M2 oversupply – something that has happened four times so far – is bad news for the stock market because it has preceded three depressions and one panic.
In other words, a significant downward move in M2 could herald new lows for Bitcoin, which often moves in tandem with US stock indices.
Currently, the weekly correlation coefficient between Bitcoin and the Nasdaq-100 is 0.92.
Bitcoin price ‘rising wedge’
Bitcoin appears to be heading towards the $15,000-$20,000 price range, depending on the potential breakdown point of what appears to be a rising wedge pattern.
For technical analysts, a rising wedge is a bearish reversal pattern that appears when the price rises higher within a range defined by two ascending contracting trend lines. It is resolved after the price breaks below the lower trend line, falling as far as the maximum height of the wedge.
Related: BTC price rebounds at $25.8K amid warning of lower interest rates for whales
If this BTC price pattern is confirmed, especially given the above macro indicators, the Bitcoin price is expected to drop to $15,000 in 2023, down about 45% from the current price levels.
This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should do their own research when making a decision.
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