Bitcoin (BTC) has risen by almost 60% to $27,000 in 2023 as the Federal Reserve is expected to pause its quantitative tightening in response to the US banking crisis. Despite this, BTC’s price has failed to break decisively above $30,000.
Buying exhaustion at this significant psychological level resulted in a price correction towards $25,000 in the past week. Interestingly, this decline has strengthened Bitcoin’s correlation with various traditional financial metrics.
The question now is whether this increases the risk of Bitcoin continuing its downtrend in Q2. Let’s take a closer look.
US dollar index’s double bottom
The US dollar index (DXY) rose 1.4% to 102.70 in the week ending May 14, which measures the strength of the greenback against a basket of top foreign currencies. This increase marked the dollar’s best week since September 2022.
Notably, the dollar’s rise resulted in a possible double bottom pattern, with two low points near a similar horizontal price level of about 100.75. A double bottom pattern is a bullish reversal setup, indicating that DXY could rise to 105.85 in the next few months.
DXY’s weekly relative strength index (RSI), which has rebounded after hitting 35, five points above the oversold threshold, further implies a bullish continuation, typically bad news for Bitcoin’s price.
The primary reason is the increasing negative weekly correlation between Bitcoin and DXY, with the coefficient around -50 as of May 14.
Earlier in the week, the latest US consumer price index (CPI) report indicated that headline inflation fell to 4.9% in April from the previous month’s 5%, while core inflation rose by 5.5%, suggesting that underlying price pressures remain elevated. This has, for now, lowered Fed rate cut expectations.
John Authers from Bloomberg explains, «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 pause from the Fed should lead to a stabilizing bond market. History suggests that stable interest rates have been favorable for US Treasuries but not for stocks. Erin Browne and Emmanuel Sharef from Pimco wrote, «If the Fed pauses at its peak rate for at least six months and the US slips into recession, then history suggests that 12-month returns following the final rate hike could be flat for 10-year US Treasuries, while the S&P 500 could sell off sharply.»
Therefore, a decline in risk appetite should bolster the dollar while increasing the risk of Bitcoin failing to reclaim $30,000 in the near term.
Gold price near key reversal point
Amid the banking crisis, the price of gold has risen by nearly 15% to over $2,000 an ounce. Its positive correlation with Bitcoin has also strengthened, with the weekly coefficient at 0.82 as of May 14.
However, gold’s rally has brought it to a notorious horizontal resistance level near $2,075. In March 2022, this level triggered a sharp bearish reversal phase that decreased the value of gold by up to 22%.
Similarly, testing the level as resistance in August 2020 preceded an 18% price decline. If this scenario repeats in 2023, the price of gold could fall to its 50-week exponential moving average (50-week EMA, the red wave) near $1,850.
Gold’s weekly RSI, hovering 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 experience a similar correction in Q2.
M2 money supply declines
M2 measures cash in circulation plus US dollars in bank and money-market accounts. Due to the Fed’s quantitative easing, the M2 figure surged by more than 40% during the Covid-19 pandemic, reaching a peak of $21.84 trillion in January 2022.
Since then, it has fallen to $20.81 trillion, down over 4% from the peak in May 2023.
A decrease of 2% or more in M2 supply, which has occurred four times to date, bodes ill for the stock market since it preceded three recessions and one panic.
In other words, a massive decline in M2 could signal new lows for Bitcoin, which often moves in tandem with US stock indexes. The weekly correlation coefficient between Bitcoin and the Nasdaq-100 index is currently 0.92.
Bitcoin price «rising wedge»
Bitcoin appears to be approaching the $15,000-$20,000 price range, depending on its possible breakdown point from what seems 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 confirmed, this BTC price pattern, combined with the macro indicators mentioned above, could result in Bitcoin’s price dropping to as low as $15,000 in 2023, a 45% decrease from present levels.
This article does not provide investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.
