Bitcoin (BTC) has rallied nearly 60% to around $27,000 in 2023 amid anticipations that the Federal Reserve would pause its quantitative tightening amid the U.S. banking crisis. Still, BTC price has failed to move beyond $30,000 decisively.
Buying exhaustion at this key psychological level led to a price correction toward $25,000 over the past week. Interestingly, the decline has strengthened Bitcoin's correlation with several traditional financial metrics.
But does this raise the risk of Bitcoin continuing its downtrend in Q2? Let's have a closer look.
U.S. dollar index's double bottom
The U.S. 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 ending 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, confirmed by two low points near a similar horizontal price level of around 100.75. A double-bottom pattern is a bullish reversal setup, suggesting DXY could rise toward 105.85 in the next few months.
DXY's weekly relative strength index (RSI), which has undergone a rebound after reaching 35 — just five points above the oversold threshold — further hints at bullish continuation, which is typically a bad omen for Bitcoin's price.
The main reason is the strengthening negative weekly correlation between Bitcoin and DXY, with the coefficient around -50 as of May 14.
Earlier in the week, the latest U.S. Consumer Price Index (CPI) report showed headline inflation dropped to 4.9% in April versus the previous month’s 5%. However, core inflation was up 5.5%, suggesting underlying price pressures remain sticky, which for now has cooled down Fed rate cut expectations.
John Authers from Bloomberg writes:
“The odds of a ‘pause’ in interest rate hikes next month have now risen to virtual certainty in futures and swaps markets, having been seen as an 84% chance before the numbers came out.”
A Fed pause should result in a stabilizing bond market. History indicates that stable interest rates have been good for U.S. Treasurys but bad for stocks, with Erin Browne and Emmanuel Sharef of Pimco saying:
“If the Fed pauses at its peak rate for at least six months and the U.S. slides into recession, then history suggests 12-month returns following the final rate hike could be flat for 10-year U.S. Treasurys, while the S&P 500 could sell off sharply.”
Thus, a souring risk appetite would be a boon for the dollar, while increasing the risk of Bitcoin failing to reclaim $30,000 in the short term.
Gold price near key reversal 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 grown stronger with its weekly coefficient reading at 0.82 as of May 14.
But gold’s rally has brought 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 led gold to drop by up to 22%.
Similarly, testing the level as resistance in August 2020 preceded an 18% price decline. Should the scenario repeat in 2023, gold’s price could fall toward its 50-week exponential moving average (50-week EMA; the red wave) near $1,850.
Gold’s weekly RSI, treading around its overbought reading of 70, indicates a similar downside scenario. As a result of the precious metal’s positive correlation with Bitcoin, the latter may see a similar correction in Q2.
M2 money supply declines
M2 measures cash in circulation plus dollars in bank and money-market accounts. The M2 figure surged by more than 40% during the Covid-19 pandemic due to the Fed's quantitative easing, hitting a peak of $21.84 trillion in January 2022.
It has since declined to $20.81 trillion, down over 4% from peak, in May 2023.
A 2%-plus drop in the M2 supply — something which has happened four times to date — is bad news for the stock market since it preceded three depressions and one panic.
In other words, the significant move lower in M2 could foreshadow new lows for Bitcoin, which often moves in tandem with U.S. 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 toward the $15,000-$20,000 price range, depending on its potential breakdown point from 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 inside a range defined by two contracting, ascending trendlines. It resolves after price breaks below the lower trendline, falling by as much as the maximum wedge height.
If this BTC price pattern is confirmed, particularly given the above-mentioned macro indicators, Bitcoin price stands to decline to as low as $15,000 in 2023, down about 45% from current price levels.
This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.