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Bitcoin (BTC) is up nearly 60% to nearly $27,000 in 2023 amid hopes that the Federal Reserve will pause its quantitative easing amid the US banking crisis. Nevertheless, BTC price has failed to move decisively above $30,000.
Buying exhaustion at this key psychological level led to a $25,000 correction in the price from the previous week. Interestingly, the decline has strengthened bitcoin’s correlation with several traditional financial metrics.
But does this increase the risk of bitcoin’s downtrend continuing in Q2? Let’s take a closer look.
US dollar index double bottom
The US dollar index (DXY), which measures the greenback’s strength against a basket of top foreign currencies, rose 1.4% to 102.70 in the week ended May 14. The rise marked the dollar’s best week since September 2022.
Interestingly, the dollar’s rise left behind a potential double bottom pattern, which was confirmed by two lows near the same horizontal price level around 100.75. A double bottom pattern is a bullish reversal setup, suggesting that the DXY may move towards 105.85 in the next few months.
The weekly Relative Strength Index (RSI) of DXY, which has undergone a rebound after reaching 35 – just five points above the oversold threshold – signals a continuation of the uptrend, which is usually a bad omen for bitcoin price.
The main reason is the strong negative weekly correlation between Bitcoin and the DXY, whose coefficient is around -50 as of May 14.
Earlier in the week, the latest US Consumer Price Index (CPI) report pegged headline inflation in April to 4.9% from 5% in the previous month. However, core inflation was up 5.5%, suggesting that underlying price pressures remain sticky, cooling expectations of a Fed rate cut for now.
John Auther from Bloomberg writes,
“The likelihood of a ‘pause’ in an interest rate hike next month has now grown to virtual certainty in the futures and swaps markets, with it seen as an 84% chance before the numbers were revealed.”
The Fed’s pause should result in a stable bond market. History indicates that stable interest rates have been good for U.S. Treasuries, but bad for stocks, say Erin Brown and Emmanuel Shareff of PIMCO. Saying,
“If the Fed holds on to its peak rates for at least six months and the US slips into a recession, history suggests that the 12-month return following the last rate hike could be flat for the 10-year US Treasury.” while the S&P 500 may sell off. Fast.”
Thus, a sour risk appetite would be a boon for the dollar, while increasing the risk of bitcoin failing to reclaim $30,000 in the near term.
Gold price near key reversal points
The price of gold has risen nearly 15% to $2,000 an ounce amid the banking crisis. The positive correlation with bitcoin has also strengthened with its weekly coefficient reading at 0.82 as of May 14.
But gold’s rally has brought its price closer to the infamous horizontal resistance level of $2,075. In March 2022, this level played a key role in triggering a sharp bearish reversal phase that saw gold drop in value by 22%.
Similarly, the resistance level was tested in August 2020 before the 18% price drop. If the scenario repeats in 2023, the price of gold could decline towards its 50-week exponential moving average (50-week EMA; red wave) near $1,850.
Gold’s weekly RSI, which is trading around its overbought reading of 70, indicates a similar downside scenario. As a result of the positive correlation of the precious metal with bitcoin, the latter could see a similar correction in Q2.
M2 money supply declines
M2 measures cash in circulation and dollars in bank and money-market accounts. The Fed’s quantitative easing caused the M2 figure to increase by more than 40% during the Covid-19 pandemic, reaching a peak of $21.84 trillion in January 2022.
It has since declined to $20.81 trillion in May 2023, down 4% from the peak.
M2 Supply Declines by Over 2% — Here’s What Happened four times to date Bad news for the stock market as there were three recessions and one panic earlier.
In other words, a significant drop in M2 could portend new lows for bitcoin, which often move in conjunction with US stock indexes.
Currently, the weekly correlation coefficient between bitcoin and the Nasdaq-100 index is 0.92.
Bitcoin Price “Rising Wedge”
Bitcoin appears to be heading towards the $15,000-$20,000 price range, depending on where it will likely break, in what appears to be a rising wedge pattern.
To technical analysts, a rising wedge is a bearish reversal pattern that appears when price moves higher within a range defined by two contracting, ascending trend lines. It gets resolved after the price breaks below the lower trend line, falling as much as the maximum wedge height.
Related: BTC Price Jumps to $25.8K Low Amid Warnings on Low Whale Interest
If this BTC price pattern is confirmed, especially looking at the above mentioned macro indicators, the bitcoin price would see a further drop to the $15,000 lows in 2023, which is roughly a 45% drop from current price levels.
This article does not constitute investment advice or recommendations. Every investment and trading move involves risk, and readers should do their own research when making decisions.
