According to analysts, the US Dollar Index (DXY), which measures the strength of the US dollar against a basket of major currencies, is showing signs of improving momentum. They believe the index may be approaching a bottom, with a potential bounce on the horizon.
However, a strengthening dollar could have significant implications for cryptocurrencies, particularly Bitcoin (BTC). The largest cryptocurrency has historically demonstrated an inverse correlation with the DXY.
DXY Shows Signs of Reversal, But Bitcoin May Feel the Pressure
In a latest post on X (formerly Twitter), Barchart shared that on the weekly chart, DXY is about to form a ‘death cross’ for the first time since January 2021.
For context, a death cross is a technical analysis pattern that occurs when a short-term moving average crosses below a long-term moving average. This is considered a bearish signal, which often leads traders to anticipate further price declines.
However, Barchart pointed out that the last two times this happened (2018 and 2021), it marked the bottom of the market. Therefore, while the signal is bearish, historical trends suggest it could indicate a potential rebound for the dollar.
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Swissblock’s Head Macroeconomist, Henrik Zeberg, also shared a similar perspective. In the latest video, he noted that many people are currently bearish on the dollar. However, according to him, this sentiment may not be accurate at this moment.
Zeberg observed that the momentum indicator (RSI) is showing higher lows. This is typically a sign that the current trend is losing strength. He added that while the dollar is currently in a downtrend, there may be a short-term bounce or stabilization.
Yet, ultimately, the DXY could still face one last phase of downward movement. This phase would potentially bring the index to a new low before the market begins to potentially recover or change direction, likely around September.
“When we see everybody now starting to become very bearish of the dollar, it may be a time where we should start to think where could we potentially see the bottom,” he said.
Meanwhile, Andrea Lisi, a Chartered Financial Analyst, argued in a recent statement that concerns about potential USD weakness are based on movements in the DXY index. However, he believes the Nominal Broad US Dollar Index (Nominal DXY) is a more reliable indicator for assessing whether the dollar is entering a bear market.
“Currently, the Nominal DXY remains firmly within its established bullish channel, with key support identified at the 120 level. Importantly, we have yet to see a decisive breach below this threshold, suggesting that any near-term weakness may be overstated,” Lisi stated.
While all this is positive for the dollar, its implications for Bitcoin are not as favorable. BeInCrypto has previously reported that Bitcoin’s price often moves in the opposite direction to the dollar’s value.
For example, past tensions between Federal Reserve Chair Jerome Powell and President Trump, or broader economic developments that put downward pressure on the DXY, have generally had a positive effect on Bitcoin’s price dynamics.
Thus, if DXY rises, Bitcoin will likely drop. Furthermore, the potential for a dollar-driven Bitcoin decline is compounded by other market factors.
BeInCrypto recently highlighted several signs of a possible slowdown, or price correction, in Bitcoin’s ongoing bull run. These include increased whale-to-exchange flows, high Coin Days Destroyed (CDD), and a negative Altcoin-Bitcoin correlation. All these suggest potential selling pressure and increased volatility.
Additionally, historical data from CoinGlass indicates that the third quarter has typically been a weaker period for Bitcoin. The average return stands at just 6.16% lagging behind other quarters.
These seasonal trends, combined with a potential DXY rebound, could create a challenging environment for Bitcoin.
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