Bitcoin (BTC) has rallied nearly 60% to around $27,000 in 2023 amid expectations that the Federal Reserve would pause its quantitative tightening amid the US banking crisis. Even so, the BTC price has failed to break above $30,000 resolutely.
The exhaustion of buying at this key psychological level triggered 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 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 major foreign currencies, rose 1.4% to 102.70 in the week ending May 14. The rise marked the dollar’s best week since September 2022.
Interestingly, the rise in the dollar left behind a potential double bottom pattern, confirmed by two lows near a similar horizontal price level around 100.75. A double bottom pattern is a bullish reversal setup, which suggests that the DXY could rally towards 105.85 in the coming months.
The weekly DXY Relative Strength Index (RSI), which has rebounded after hitting 35 – just five points above the oversold threshold – further hints at bullish continuation, which is usually a bad omen for Bitcoin price. .
The main reason is the strengthening of the negative weekly correlation between Bitcoin and DXY, with the coefficient around -50 as of May 14.
Earlier in the week, the latest US Consumer Price Index (CPI) report showed headline inflation fell to 4.9% in April, from 5% the previous month. However, core inflation rose to 5.5%, suggesting that core price pressures remain firm, which has dampened Fed rate cut expectations for now.
Bloomberg’s John Authers writes:
“The odds of a ‘pause’ in interest rate hikes next month have risen to near certainty in the futures and swaps markets, having been viewed as an 84% chance before the release of the figures”.
A Fed pause should translate into a stabilization of the bond market. History indicates that stable interest rates have been good for US Treasuries but bad for stocks, according to Pimco’s Erin Browne and Emmanuel Sharef:
“If the Federal Reserve pauses its maximum rate for at least six months and the US enters a recession, history suggests that the 12-month yield after the last rate hike could be flat for US Treasuries. to 10 years, while the S&P 500 could fall sharply.
Thus, a soured risk appetite would be a boon for the dollar, while increasing the risk that Bitcoin will not recapture $30,000 any time soon.
Gold price close to a key turning point
The price of gold has risen nearly 15% to over $2,000 an ounce amid the banking crisis. The positive correlation with Bitcoin has also strengthened, with a weekly coefficient of 0.82 as of May 14.
But gold’s rally has pushed its price to an infamous horizontal resistance level near $2,075. In March 2022, this level was instrumental in triggering a sharp bearish reversal phase that sent the value of gold falling as much as 22%.
Similarly, the test of the level as resistance in August 2020 preceded a price drop of 18%. If the scenario were to repeat itself in 2023, the gold price could fall towards its 50-week exponential moving average (50-week EMA; the red wave) near $1,850.
Gold’s weekly RSI, around its overbought reading of 70, indicates a similar bearish scenario. As a result of the precious metal’s positive correlation with Bitcoin, the latter could see a similar correction in Q2.
The money supply M2 decreases
M2 measures cash in circulation plus dollars in bank and money market accounts. The M2 figure spiked by more than 40% during the Covid-19 pandemic due to the Fed’s quantitative easing, peaking at $21.84 trillion in January 2022.
Since then it has fallen to $20.81 trillion, more than 4% from the peak in May 2023.
A drop of more than 2% in M2 supply – something that has happened four times to date – is bad news for the stock market, as it preceded three depressions and one panic.
In other words, the significant move lower 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 Index is 0.92.
The “rising wedge” of the Bitcoin price
Bitcoin appears to be heading towards the $15,000-$20,000 price range, depending on its potential breakout 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 further within a range defined by two contracting ascending trend lines. It resolves after the price breaks below the lower trend line, falling by as much as the maximum height of the wedge.
If this BTC price pattern is confirmed, especially taking into account the macro indicators mentioned above, the price of Bitcoin could fall as low as $15,000 by 2023, which would be a 45% drop from current price levels.
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