The U.S. dollar index (DXY) is showing signs of a short-term top as the price of Bitcoin (BTC) demonstrates signals of a short-term rally.

There is a narrative that the price of Bitcoin often coincides with a drop in the value of the dollar.

Since stores of value, like gold and Bitcoin are priced against the dollar, theoretically, a downtrend in the DXY would likely have a positive impact on the price of BTC.

Bitcoin retakes $50,000 again

As the dollar began to consolidate, Bitcoin broke above $50,000 on March 3, putting it on track to retest the $51,600 resistance level once again.

BTC/USD 1-day candle chart (Bitstamp). Source: Tradingview

Above $51,600, there is little resistance until $56,000. Hence, breaking past this level is critical to secure upside momentum in the short term.

Bitcoin Jack, a semi-pseudonymous trader, who predicted the $3,600 bottom in March 2020, said:

"Considering it's very likely to see a $1.9T stimulus package approved within the next 2 weeks, my best guess is dollar is topping out here. Could be wrong, but structure looks very similar to previous consolidation as well."
The U.S. dollar index. Source: Tradingview.com, Bitcoin Jack

If Bitcoin continues to rally as the dollar stagnates, it could allow BTC to simultaneously benefit from two macro factors.

First, the dollar's decline naturally benefits Bitcoin. Second, the impending $1.9 trillion dollar U.S. stimulus could serve as a catalyst for a broader BTC rally while diluting the value of the dollar.

Bitcoin likely slumped in the past week due to the shaky macro climate, as the dollar began to climb and bond yields rose to a yearly high.

If the macroeconomic conditions were the major catalyst for Bitcoin's downturn, now that bond yields are easing, it could bouy BTC's momentum in the coming weeks.

Was $42.9K the local bottom?

According to John Cho, the director of global expansion at Ground X, $42,900 was most likely the local bottom for Bitcoin in the foreseeable future.

Cho earlier predicted a short-term Bitcoin downturn, expecting a drop to around $40,000 to $41,000. BTC did not drop that low, but it declined to sub-$43,000, almost completing a 30% drop from its local high. Cho said:

"As of the now, 42.9k seems to have been the (local) bottom. Either way, glad the bulls are back in control."
Bitcoin price structure. Source: John Cho.

Although $44,000 was a major support level, Bitcoin's quick recovery to $51,000 suggests the drop itself was a deviation.

In technical analysis, the term deviation refers to when an asset briefly drops or rises above a key level, and then reverts to the mean.

Following the strong recovery of Bitcoin, it is critical for the dominant cryptocurrency to retest the $56,000 resistance area. Above it, the path toward a new all-time high is open, making $60,000 the next likely target.