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Bitcoin (BTC) and Ether (ETH), the two largest cryptocurrencies in terms of market capitalization, have outperformed traditional risk assets by a significant margin this year, with gains of 70% and 56%, respectively.

Nonetheless, the bullish trend of Bitcoin and Ether could be threatened if the heavily shorted U.S. dollar, which has recently reached a "double bottom" price point against major fiat currencies, experiences a short squeeze - a rally fueled by a reversal of bearish positions, according to QCP Capital, a Singapore-based options trading firm.

"The biggest obstacle for crypto remains the USD - where we think the market is heavily positioned to the short side and vulnerable to a short squeeze, which could take BTC/ETH and Gold lower in response," QCP's markets insights team said in a note shared with CoinDesk.

Bitcoin has historically exhibited an inverse relationship with the dollar index. This negative correlation has become stronger lately, which suggests that a short squeeze in the dollar could have a negative impact on both the leading cryptocurrency and the broader market.

Shorting is a strategy where traders take a bearish position on the price of an asset. A short squeeze happens when the asset that has been heavily shorted begins to rise, forcing the bears who hold open short positions to buy back the asset to minimize their losses. This buying activity creates upward pressure on the asset's price, causing a further increase in its value.

The dollar index measures the value of the U.S. dollar against major fiat currencies. It reached its peak of 114.78 in late September of last year but has since declined by over 13%, largely due to optimism that the Federal Reserve (Fed) will change its stance on interest rate hikes. According to data from Scotiabank obtained via Wall Street Journal, hedge fund managers have increased their short bets against the dollar, which now stand at around $12.2 billion as of April 25th.

Will the dollar see a short squeeze?

If Federal Reserve Chairman Jerome Powell sticks to a data-dependent policy stance on Wednesday, going against market expectations for a hint of a dovish pivot in favor of renewed rate cuts, the U.S. dollar could experience a short squeeze.

"Looking at the Fed pricing, you can certainly say the pivot is fully priced in. It is the U.S. banking crisis/debt ceiling/recession that is the beta for the USD from here. We believe that the 12% drop in the USD is pricing in the more pessimistic scenarios on these three and which we believe make it ripe for a short-term squeeze," QCP's team told CoinDesk.

Traders have shown through Fed funds futures that they anticipate the Federal Reserve to implement its last 25 basis point rate hike on Wednesday, followed by a shift towards rate cuts starting in July. The Fed had begun its tightening cycle in March of last year, causing turbulence in various risk assets, including cryptocurrencies, and has increased rates by a total of 475 basis points since then.

Double bottom in DXY

The dollar index experienced a rebound from levels close to its February low of 100.82 about two weeks ago. This confirmed the bullish technical analysis pattern known as the "double bottom".

The repeated pattern indicates that purchasers have demonstrated resilience on two occasions in the same region, establishing a support level for an upward price momentum.

"We note the positive divergence in RSI and MACD, and a potential double bottom at 101," QCP's insights team said. "For the USD (DXY), the key level to the topside is 102.5, where we expect a break higher to lead to a sharp correction lower in crypto."

The relative strength index is a tool utilized to assess instances of overbought or oversold markets, whereas the MACD measures the potency of trends and their potential changes. A bullish divergence occurs when an asset's value hits a fresh cyclical trough, and the RSI and/or MACD start to ascend, suggesting an imminent shift in momentum toward bullish sentiments.

 

 

Source Coindesk