Dollar traders have been closely watching a potentially bullish head and shoulders pattern build up on the US Dollar Index Chart (DXY). Meanwhile, the stronger greenback smell is weakening Bitcoin’s (BTC) bullish fall, especially as the leading cryptocurrency struggles to break out of the current $ 30,000-35,000 trading range.

Three floors, one price cap

In particular, an inverse head and shoulders pattern (IH&S) forms after a downtrend. It contains three consecutive floors, with the middle groove (head) being the deepest of the other two (shoulders). Ideally, the shoulders should be equally high and wide. All three of these lows are exposed to a price cap called a limit, which acts as a resistance.

DXY, a measure of the dollar’s strength against a leading basket of currencies, now checks all the boxes to show that an IH&S pattern has formed.

The index is now testing the prospect of a bullish breakout at a close above its resistance. A technical profit target is set at a distance that corresponds to the price difference between the neckline and the underside of the head.

Bullish setups expect DXY to rise nearly 5% in the event of a neck break.

Meanwhile, the index’s 50-day simple moving average (50-day SMA; blue wave) is predicted to cross the 200-day simple moving average (20-day SMA; saffron wave) for confirmation. Traders view the gold cross as a bullish indicator.

Dollar basics

The weaker dollar environment after March 2020 acted as headwinds to risk assets and global growth, boosted by quantitative easing by the Federal Reserve to mitigate the economic fallout from the coronavirus pandemic. DXY ended 2020 with a loss of 6.83%.

However, early in 2021, the dollar is showing signs of reversal as the U.S. economy rebounds sharply amid the rapid roll-out of the coronavirus vaccination program. As markets reopen, demand for dollar and dollar-based investments is increasing among global investors.

Brent Johnson, CEO of Santiago Capital, calls the dollar the “Giffen Good,” an asset class whose demand increases with price. He noted that despite rising inflation, due to the Fed’s money printing, global investors have increased their dollar-denominated debt, adding:

“The continued issuance of USD-denominated debt will increase the demand for USD in the future (the debt must be paid in USD), and as mentioned above, this demand will not decrease as the price increases.”

Kevin Kelly, chief financial analyst at Delphi Digital, said the net speculative futures positioning on DXY is not as bearish as it was in early 2021. He added that the setup is very similar to the positioning of DXY in early 2021. 2018, followed by around 10% price increase over the next 18 months.

Adjust inflation

A recent rally in the DXY market was accompanied by three consecutive monthly inflation spikes. The US consumer price index rose 5.4% year-over-year, its highest in 12 months since August 2008, according to the latest Labor Department release on Tuesday.

James Freeman, associate editor for the Wall Street Journal, blamed the Fed’s monetary pressures for the ongoing inflationary pressures, noting that one dollar resulted in every dollar. However, the Fed has made inflation a temporary issue, giving bullish support to the DXY rally.

Speaking to Congress on Wednesday, Fed Chairman Jerome Powell admitted that the current economic climate does not allow them to implement the bank’s quantitative easing measures, including $ 120 billion a month in bond purchases. Powell added, however, that the Fed will warn markets in advance if they decide to cut purchases.

Combined with lower interest rates, the Fed’s expansionary policies have resulted in cheaper lending, and thus increased demand for assets like real estate, technology stocks, gold, and even bitcoins. At the same time, however, fears that sustained rising inflation could cause the central bank to cut interest rates have put pressure on seemingly overvalued assets to lose some of their annual profits.

For example, Bitcoin, often touted as a hedge against higher inflation, has fallen more than 50% from its record high of around $ 65,000. Its decline is mainly due to global regulatory raids, including an exodus of Chinese mining. But the decision by the Federal Reserve’s Open Market Committee in mid-June to cut interest rates in 2023 could also intensify the downward momentum.

“If the US dollar reverses its trend, it risks pouring cold water on some of the most popular trades of the year,” noted Kelly.

“Commodities, gold, emerging market stocks and Bitcoin are all vulnerable to a stronger greenback, although the speed at which it moves is still an important factor.”

However, some analysts see a rising dollar as no threat to Bitcoin and believe that investors will continue to align part of their portfolios with the emerging global asset.

For example, Cathie Wood, founder and CEO of ARK Invest, told CNBC that after overcoming worries surrounding the ban on cryptocurrency mining, Bitcoin could bounce back more firmly.

An Intertrust survey of hedge fund CFOs around the world also shows that they will significantly increase their exposure to cryptocurrencies by 2026. 17% of respondents expect Bitcoin and similar digital assets to allocate more than 10% of them.