Strong Dollar Could Kick Bitcoin Back Below $10,000

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  • The U.S. dollar has broken a long downtrend and looks set to reverse
  • The DXY is typically inversely correlated to Bitcoin, suggesting Bitcoin could be impacted
  • There are several key levels which Bitcoin needs to hold in order to maintain overall uptrend

The U.S. dollar has broken through a six-month downtrend in a move that has the potential to send Bitcoin back below $10,000. The DXY, which represents the strength of the dollar compared to six other currencies, looks to have bottomed after crashing since March, and its strength could, temporarily at least, kick Bitcoin’s bull market into touch.

Dollar Bounces as Bitcoin Stalls

As we reported last month, the U.S. Dollar Index is negatively correlated to Bitcoin, meaning that when the dollar is strong Bitcoin’s price tends to be weak, with the reverse also being true. The 2017 bull run was possible partly because the dollar was experiencing a crash at the same time, a pattern that has repeated since March; while the value of the U.S. dollar has been collapsing, Bitcoin’s price has been soaring:

US dollar vs Bitcoin 1

However, after six months of this growing divide, aided by the American government’s rampant money printing in response to the coronavirus pandemic, it looks as though the situation might be about to reverse. If we look at the DXY, is has spent the whole of August in a consolidation phase following a long downtrend:

US Dollar chart 2

This consolidation suggests that the downward price action has ended and the DXY has bottomed out. We can match this against Bitcoin’s price action of the last 3-4 weeks:

Bitcoin chart 3

Both these assets are clearly plateauing after their respective runs since March, in Bitcoin’s case a positive run and in the dollar’s case a negative one, both ranging while deciding on a next move. Bitcoin’s future is unclear, but the dollar’s seems much easier to forecast:

US Dollar chart 4

The dollar has very clearly broken through a single downtrend episode that began in early July, echoing the larger reverse that began in March. This clearly shows that the U.S. dollar has not just bottomed out but looks to be on the verge of a reverse, which would very likely spell bad news for Bitcoin as well as silver and gold, all of which are assets that investors have flocked to in the wake of the coronavirus pandemic.

Bitcoin’s Key Support Levels

Should Bitcoin begin to reverse, we have several levels of support to look at:

Bitcoin support 5

$11,200 marks the lower end of Bitcoin’s current range, after which we will be looking at $10,800 and $10,500 as key levels to hold. However, it can’t be ignored that there is a CME gap at $9,700 which will be looking more like a tempting spot to long the closer we get to $10,000.

Dropping down to these levels would not mean that the bull market is invalidated, providing we get a strong response. Failing to show strength at the $10,000 or below would mean we need to reassess our bullish outlook, but given the fundamental nature of both Bitcoin and the dollar at the moment this is a less likely probability.